Investing in the National Pension System (NPS) has been a popular topic of discussion in recent years from the perspective of savings taxes for individual taxpayers, given the various changes in income tax laws. Tax benefits are available in relation to contributions to NPS made by the employer as well as the employee / self-employed person to the NPS Tier 1 account.
The tax benefits in the stage of contributions are summarized below:
Section 80CCD (1) of the Income Tax Act of 1961 establishes a deduction with respect to contributions made by an individual taxpayer to the NPS. A person who has deposited any amount into their NPS account during the tax year can claim a deduction from their gross income determined at 10% of basic salary for people who work and 20% of total income for people who are self-employed. This deduction is intended for contributions made by the individual, either directly or through the employer, that is, as a deduction from wages. However, the discount available in this section is also limited to the total limit of Rs 1.5 lakh prescribed under Section 80CCE of the Act.
Section 80CCE defines the total level of deduction available under Sections 80C and 80CCD (1) of the Income Tax Act. Therefore, the investment in the basket of Section 80C (EPF, PPF contributions, etc.) and Section 80CCD (1) (contributions to the NPS, directly or through the employer) in the fiscal year cannot exceed the specified limit of Rs 1.5 lakh per year Finance.
Currently, Section 80CCE allows an individual to deduct up to Rs 1.5 Lakh from gross total income (before calculating the tax to pay) if Rs 1.5 lakh is invested in specific avenues (including NPS). Some specific expenditures are also eligible for deduction under a limit of Rs 1.5 lakh from Section 80CCE. Examples of specific expenditures include repaying the principal amount on a home loan, children's school fees, etc.
Note that the maximum amount that can be invested in NPS to claim the deduction under Section 80CCD (1) cannot exceed 10% of a person's basic salary. Therefore, if 10% of basic salary is less than Rs 1.5 lakh, say Rs 90,000, then to make full use of Rs 1.5 lakh available under Sections 80C and 80 CCD (1), the difference, i.e. Rs 60,000 in this case should be invested in other specific avenues available in Section 80c, such as Provident Fund, Tax Saving Fixed Deposits, etc., Rs 50,000 can be deposited in NPS as per Section 80CCD (1b) in addition to the 90,000 rupees mentioned above. This discount of Rs 90,000 will be claimed under Section 80CCD (1).
Additional deduction in NPS
To encourage investment in NPS, Section 80CCD (1B) of the Income Tax Act allows an additional deduction of Rs 50,000 and more than Rs 1.5 lakhs available under Section 80CCE.
Therefore, when the individual taxpayer has exhausted the limit of Rs 1.5 lakh under Section 80CCE by making other investments eligible for the deduction under said section (apart from NPS), the contribution made (either by himself or through the salary deduction) towards the NPS to claim an additional Rs 50,000 deduction under Section 80CCD (1B). Below are some illustrative scenarios regarding an individual's claim of deduction:
* It is assumed that the employee's contribution to the NPS does not exceed 10% of the employee's salary.
Taxes on contributions made by an employer to an employee's NPS account are subject to Section 17 (1) (viii) of the Income Tax Act, which states that these contributions are taxable salary income held by of the employee. However, a deduction is available under Section 80CCD (2) of the Income Tax Act for the amount contributed by the employer, which is limited to 10% of basic salary for the tax year (the enhanced limit of 14% applied to central government employees). The deduction under this section is more than the deduction available for the employee contribution discussed above and is not subject to the total limit of Rs 1.5 lakh under Section 80CCE and Section 80CCD (1b).
However, Finance Act 2020 has amended Section 17 (2) (vii) according to which the total employer contribution to Provident Fund (PF), NPS, and Superannuation Fund in excess of Rs. 7.5 lakh in a fiscal year is treated as the topic of Taxable requirements for the employee.
Also, in accordance with Section 17 (2) (viia), any interest, dividend, etc. derived from excess contributions made by the employer above Rs 7.5 lakh will also be taxed. The previous provision establishes that the annual accruals attributable to excess contributions will be calculated "in the manner determined". However, the account guidelines are still pending.
Here are some illustrative scenarios regarding taxes on employer contributions to the NPS:
* Assume that the employer's contribution to the NPS does not exceed 10% / 14% of the employee's salary.
** Interest earned on excess business owner contributions above Rs. 7.5 lakh per fiscal year, Therefore, accrued interest on Rs 1.3 lakh will also be taxable under Section 17 (2) (viia) of the Income Tax Act as stated above.
Also Read: Govt unveils new guidelines to regulate content on social media, OTT platforms