Before we start to understand whether the deduction for NPS under the new tax system is available or not it is imperative to understand the types of deduction available for contribution to an NPS Fund.
Deduction for NPS under the Income Tax Act is available only to an Individual under section 80CCD which falls under Chapter VI-A.
The salient features of section 80CCD for deduction towards contribution to NPS are given below:
1. The deduction under this section is available only for contribution to the 'New Pension System' (NPS).
2. The deduction is available only to an Individual who is-
(i) a central government employee, or
(ii) a private sector employee, or
(iii) a self-employed.
(i) by the central government, for a central government employee,
(ii) by the employer of the individual, for a private sector employee,
(iii) by the individual himself.
4. There are three types of deduction available under this section for contribution to the NPS Tier-I account. These are:
(i) Under section 80CCD(1): Deduction is available for the whole amount of employee's or self contribution to the NPS account subject to the following ceiling-
(a) in the case of an employee (both central government and private sector), 10 percent of his salary of the previous year,
(b) in the case of a self-employed individual, 20 percent of his 'Gross Total Income'.
Salary for this purpose means Basic Salary and Dearness Allowance (D.A.).
(ii) Under section 80CCD(1B): An additional deduction, subject to a maximum of Rs. 50,000 is available to an Individual if he contributes any sum to the NPS Tier-I account in a financial year.
(iii) Under section 80CCD(2): An additional deduction under sub-section (2) is available for the employer's contribution to the NPS account of the employee. The deduction is limited to:
(a) 14 percent of the salary of the previous year in the case of a central government employee,
(b) 10 percent of the salary of the previous year in the case of any other employee.
Salary for this purpose means Basic Salary and Dearness Allowance (D.A.).
The employer's share of contribution to the NPS account of the employees is regarded as 'Salary' income of the employee under section 15.
To understand the deduction under section 80CCD more aptly, the provisions are illustrated through a graphical presentation.
Section
|
80CCD(1)
|
80CCD(1B)
|
80CCD(2)
| |
Available to
|
Individual only
(Salaried and Self-employed)
|
Individual only
(Salaried and Self-employed)
|
Employees only
| |
Who can Contribute
|
Individual himself
|
Individual himself
|
Employer
| |
Where to Contribute
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NPS Tier-I A/c
|
NPS Tier-I A/c
|
NPS Tier-I A/c of the employee
| |
Amount of Deduction that can be claimed
|
Salaried
|
10% of salary
|
Amount of Contribution
|
Maximum 14% of Salary for a Central government employee and 10% for any other employee
|
Self Employed
|
20% of GTI
| |||
Ceiling on maximum amount of Deduction
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Subject to the limit prescribed in section 80CCE of Rs. 1,50,000
(Included in 80CCE)
|
Rs. 50,000.
Over and above Rs. 1,50,000
(Excluded from 80CCE)
|
Over and above Rs. 1,50,000
(Excluded from 80CCE)
| |
Read more on Income Tax Deductions for Salaried Employees
Effective financial year 2020-21 (or assessment year 2021-22), there will be two tax regimes for personal income tax purposes.
1. One tax regime called as Old tax regime under which an individual can claim all the admissible deductions and exemptions in computing his total income and then computes the tax payable as per the tax rates specified in the relevant Finance Act. This regime is the same which is continued in FY 2019-20 or for AY 2020-21. This method of computation of income and tax is continued in AY 2021-22 and is named as 'Old regime of tax'.
2. Another tax regime called a New tax regime under which an individual can pay income tax on his total income at a concessional or lower rate as compared to Old tax regime. However, in the new tax regime, the taxpayer has to forego certain deductions and exemptions while computing the total income and then computes the tax payable as per the tax rates specified in Section 115BAC of the Income Tax Act, 1961. This regime is newly introduced from AY 2021-22 or FY 2020-21.
The new tax regime is optional for a taxpayer. In other words, a taxpayer may opt for the 'old regime of tax' or may opt for the 'new regime of tax'. Anyone method of tax regime may be chosen by the individual or HUF as per his wish.
The new tax regime is optional for a taxpayer. In other words, a taxpayer may opt for the 'old regime of tax' or may opt for the 'new regime of tax'. Anyone method of tax regime may be chosen by the individual or HUF as per his wish.
Under the new regime of tax, the tax rates are specified in section 115BAC of the Income Tax Act, 1961.
Under section 115BAC(2)(i), the total income of an Individual and a HUF shall be computed inter-alia without any exemption or deduction under any of the provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA.
Section 80JJA is relevant for an assessee having business income and hence not discussed here.
Section 80CCD(2) as stated above is related to the deduction for the employer's contribution to the NPS account of the employee. As stated above, deduction under section 80CCD(2) is an additional deduction under the old tax regime and it is continued in the new tax regime.
On the face, it is appearing that one can get an additional tax deduction for the employer's contribution to the NPS account of the employee in the new tax regime. This is because section 115BAC(2)(i) although restricts any deduction under chapter- VI-A but allows a deduction under section 80CCD(2) which is allowed for the employer's contribution to the NPS account of the employee.
But this is not the true fact. This deduction has no additional tax benefit. This deduction is given additionally because, under section 15, the employer's contribution to the NPS account of the employee is included in the total income of the employee as 'Income from Salary'.
As per section 17(1)(viii), Salary includes the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.
NPS Tier-1 is the notified pension scheme for section 80CCD.
Hence, in the first instance, the entire amount of the employer's contribution to the NPS account of the employee is included as 'salary income' of the employee. Thereafter, a deduction under section 80CCD(2) is allowed to the following extent-
If the employer's contribution exceeds the amount of deduction the same becomes taxable.
Hence, the amount of deduction available under section 80CCD(2) is at first included as salary income in the total income of the employee. To avoid taxation of the same in the hands of the employee, an additional deduction is allowed from the total income under section 80CCD(2) and it is continued in the new tax regime.
If the amount of employer's contribution is equal to the amount of deduction, then there are no additional tax benefits to the employee. The position is the same under the old tax regime as well as the new tax regime. No additional deduction is allowed as such under the new tax regime.
The picture looks rosy only when section 115BAC is read in isolation. If the same is read with section 17(1)(viii), then one will find that there is no 'additional' tax benefit under the new tax regime.
It must be remembered that section 115BAC(2) allows for deduction under section 80CCD(2) only. The additional deduction of Rs. 50,000 for contribution to NPS account by the employee, which is still available under the old tax regime over and above the limit of Rs. 1,50,000, is covered under section 80CCD(1B). Hence, the deduction for the same is not available under the new tax regime if one opts to pay tax under section 115BAC.
Under section 115BAC(2)(i), the total income of an Individual and a HUF shall be computed inter-alia without any exemption or deduction under any of the provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA.
Section 80JJA is relevant for an assessee having business income and hence not discussed here.
Section 80CCD(2) as stated above is related to the deduction for the employer's contribution to the NPS account of the employee. As stated above, deduction under section 80CCD(2) is an additional deduction under the old tax regime and it is continued in the new tax regime.
On the face, it is appearing that one can get an additional tax deduction for the employer's contribution to the NPS account of the employee in the new tax regime. This is because section 115BAC(2)(i) although restricts any deduction under chapter- VI-A but allows a deduction under section 80CCD(2) which is allowed for the employer's contribution to the NPS account of the employee.
But this is not the true fact. This deduction has no additional tax benefit. This deduction is given additionally because, under section 15, the employer's contribution to the NPS account of the employee is included in the total income of the employee as 'Income from Salary'.
As per section 17(1)(viii), Salary includes the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.
NPS Tier-1 is the notified pension scheme for section 80CCD.
Hence, in the first instance, the entire amount of the employer's contribution to the NPS account of the employee is included as 'salary income' of the employee. Thereafter, a deduction under section 80CCD(2) is allowed to the following extent-
(a) 14 percent of the salary of the previous year in the case of a central government employee,
(b) 10 percent of the salary of the previous year in the case of any other employee.
If the employer's contribution exceeds the amount of deduction the same becomes taxable.
Hence, the amount of deduction available under section 80CCD(2) is at first included as salary income in the total income of the employee. To avoid taxation of the same in the hands of the employee, an additional deduction is allowed from the total income under section 80CCD(2) and it is continued in the new tax regime.
If the amount of employer's contribution is equal to the amount of deduction, then there are no additional tax benefits to the employee. The position is the same under the old tax regime as well as the new tax regime. No additional deduction is allowed as such under the new tax regime.
The picture looks rosy only when section 115BAC is read in isolation. If the same is read with section 17(1)(viii), then one will find that there is no 'additional' tax benefit under the new tax regime.
It must be remembered that section 115BAC(2) allows for deduction under section 80CCD(2) only. The additional deduction of Rs. 50,000 for contribution to NPS account by the employee, which is still available under the old tax regime over and above the limit of Rs. 1,50,000, is covered under section 80CCD(1B). Hence, the deduction for the same is not available under the new tax regime if one opts to pay tax under section 115BAC.
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Readings on Section 115BAC
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