Employers' contributions in NPS account to be exempt from tax - Printable Version
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Employers' contributions in NPS account to be exempt from tax - hemant sharma - 03-07-2011 06:55 PM
Employers' contributions in NPS account to be exempt from tax
Are you upset by the budget because your tax saving has increased only by a meagre Rs2,060? What if we tell you that, in fact, it can go up by much more? Surprised? What you need to do is look at the bigger picture. In this case, it’s your contribution to the National Pension System (NPS). The Budget has proposed that from 1 April 2012, employers’ contributions to the NPS can be deducted as a business expense by them. And the icing on the cake is that such contributions will not be included in the Rs1 lakh limit exemptions that you can avail of under Section 80C.
“Presently, in case of an employee, a deduction up to Rs1 lakh is permitted in respect of specified expenses/ investments against his total income. This deduction includes the contribution made to the pension fund,” says Milind S. Kothari, partner, MZS & Associates. However, this has been altered in the budget proposal. Contributions made by an employer to a pension scheme will now not be included under Section 80C. So, in your next salary increment, ask your employer to restructure your salary and include the NPS. Your employer will not have a problem acceding to your wish as according to the latest budget, ‘ employers are allowed deduction’ on their contribution to the NPS.
Earlier, only the contributions towards a recognised provident fund, approved superannuation fund or gratuity fund was allowed as a business expense. “As pension funds are outside the purview of the aforesaid classified funds, the employer’s contribution towards them was not allowed as a business deduction,” says Kothari. As this has now been tweaked in the budget, employers might be willing to include the NPS in your pay package. However, employer’s can claim deduction only on 10% of the salary (basic and dearness allowance). So, if your basic annual salary is Rs5 lakh, your employer will be willing to contribute up to Rs50,000 only. Restructuring your salary will also help reduce your tax outgo.
Suppose you earn a basic salary of Rs15 lakh and, apart from the various salary components of HRA, leave travel allowance, etc, get an additional Rs6 lakh as special allowance. Currently, you can reduce your taxable income by Rs1.2 lakh by investing in tax-saving instruments under Section 80C and infrastructure bonds. However, if you request your company to pay Rs4.5 lakh as special allowance and put the balance Rs1.5 lakh into the NPS, your taxable income will come down further. So, from 2012, you will be able to reduce your taxable income by Rs2.7 lakh, which means you will pay tax on Rs18.3 lakh. As the exemption limit has increased to Rs1.8 lakh, this further gets reduced to Rs16.5 lakh.
This year, if you pay a tax of Rs3.66 lakh, for 2012-13, you will have to pay only Rs3.15 lakh—a saving of Rs51,000. There are other advantages of contributing to the NPS. “In the NPS you can contribute a specified amount to equity and choose how to invest based on your risk appetite. Also, as the account is in an employee’s name, you can transfer it from one company to another with ease,” says Gangapriya Chakraverti, an independent HR consultant.
Though clarification is awaited on how the arrangement will work, it is likely to be confined to the tier-I account. Investors cannot withdraw from the tier-I account before they turn 60. Even then, 60% of the corpus must go into investing in an annuity for a monthly pension.
Source Link: The Economic Times_March 7, 2011
RE: Employers' contributions in NPS account to be exempt from tax - hemant sharma - 09-01-2011 02:28 PM
Present scenario is very bad for Railway employees who joined on or after 01-01-2004. Employee contribution as well as Employer contribution (Govt. contribution towards Tier-I) towards NPS both are counted as Employee's Income as well as saving under section 80-C. This way Income tax is more on the employee who is in NPS system (by artificially increasing the salary) compare to the employee who is under Old Pension System, even though basic pay and grade pay are same.
IRTSA should take this matter to authority as well as we should ask our recognised unions for a favourable action of equality of the employees in regard of Income Tax.