Frequently asked questions on New Pension Scheme and its deduction u/s 80CCD

Q1: Who can claim deduction u/s 80CCD regarding new pension scheme?

A1:   As per the provisions of section 80CCD of the Income Tax Act, 1961,

  • Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004, has in the previous year paid or deposited any amount in his account under a pension scheme as notified vide Notification No. F.N. 5/7/2003- ECB&PR dated 22.12.2003, he shall be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed ten per cent of his salary in the previous year.
  • The benefit of new pension scheme has been extended to any other employees (also self-employed person) with retrospective effect from 1-4- 2009 (A.Y. 2009-10)
  • Similarly, w.r.e.f A.Y. 2009-10 deduction u/s 80CCD is also allowed to employees up to 10 per cent of salary in the previous year and in other cases up to 10 per cent of his gross total income in the previous year.

Q2: What is the quantum of deduction u/s 80CCD?

A2: Circular No-1/2010 dated 11th Jan’2010 issued on the subject of Deduction of Tax at Source etc. clarifies that in accordance with the provisions of Section 80 CCD, deduction in respect of contribution made by an individual in the previous year to his account under a pension scheme notified, is allowed in computation of his total income –

(a) In the case of an employee, ten per cent of his salary in the previous Year; and

(b) In any other case, ten per cent of his gross total income in the Previous year.

2. It further clarifies that where the Central Government or any other Employer makes any contribution to the account of employee for the pension scheme, the assessee shall also be allowed a deduction in the computation of his total income of the whole of the amount contributed by the Central Govt. or any other employer as does not exceed 10% of his salary in the previous year.

One point that needs clarification is that whether contribution made by Central Government or other employer needs to be added to the income of the assessee before allowing deduction or not. In my opinion, yes, firstly it should be added and then deduction u/s 8OCCD should be allowed.

Q3: What is the meaning of salary for the purposes of section 80CCD?

A3: Salary for the purpose of section 80 CCD includes dearness allowance if the terms of employment so provide, but excludes all other allowances and perquisites.

Q4: Can you please illustrate the above with the help of an example?

A4: sure, let’s take an example:

Mr. X is a central govt. employee under the new contributory pension scheme; Govt contributes 10% to his pension fund.

Mr. X’s salary structure is as follows:

Basic salary- 2, 00,000/-

D.A. (included for the purpose of retirement benefits) 100,000.00

Allowances taxable: 40000.00

Perquisites taxable: 60000.00

Investment u/s 80C LIC/M/F = 1,00,000.00

Mr. X has contributed Rs. 30,000.00 to his new pension scheme and the central Govt. also makes a matching contribution of Rs. 30,000.00. Compute the income and deduction u/s 80 CCD.

The income of Mr. X is as under:

ParticularsIncomeTotal income
Basic salary2,00,000.00
D.A.1,00,000.00
Allowances taxable40,000.00
Perquisites60,000.00
Central Govt. contrib. to NPS30,000.004,30,000.00
Deduction u/s 80CCD (1) Employee’s contribution10% of Basic salary+ DA30,000.00
Deduction u/s 80CCD (2) Employer’s contribution10% of Basic salary+ DA30,000.00
Deduction u/s 80CRestricted to 40,000.00 though investment is 1,00,000.00 because of section 80CCE40,000.00
Net taxable income3,30,000.00

Q5:? Can I claim deduction on account of NPS u/s 80 C?

A5:, NPS contribution cannot be claimed u/s 80C, as section 80CCD (4) clearly disallows any deduction u/s 80C on account of NPS

80CCD (4) Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (1),—

(a)   no rebate with reference to such amount shall be allowed under section 88 for any assessment year ending before the 1st day of April, 2006;

(b)   no deduction with reference to such amount shall be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.]

Another point that I see which is quite harsh for the employees is that the aggregate amount of deduction under sections 80C, 80CCC and 80CCD cannot exceed Rs. 1,00,000 (section 80CCE)

Q6: What is the tax treatment at the time of withdrawal of fund from NPS?

A6: The NPS would follow the EET (Exempt – Exempt – Taxed) regime of taxation.

There are basically 3 types of taxation regimes,”

(1)   EEE- Exempt Exempt Exempt- example LIC

(2)   EET- Exempt Exempt Taxable- example NPS (3) ETE- Exempt, taxed, Exempt- FDR for 5 years.

Some more examples:

Public Provident Fund (PPF)

Investment: Tax-deductible Accumulation: Tax-free Withdrawal: Tax-free

That is, the Exempt – Exempt – Exempt or EEE regime is followed for PPF.

National Savings Certificate (NSC)

Investment: Tax-deductible Accumulation: Taxable Withdrawal: Tax-free

That is, the Exempt – Taxed – Exempt or ETE regime is followed for NSC.

Provident Fund (PF) and Voluntary Provident Fund (VPF)

Investment: Tax-deductible Accumulation: Tax-free Withdrawal: Tax-free

That is, the Exempt – Exempt – Exempt or EEE regime is followed for PF and VPF.

Some pension plans

Investment: Tax-deductible

Accumulation: Tax-free

Withdrawal: Taxed (The monthly pension is taxable)

That is, the Exempt – Exempt – Taxed or EET regime is followed for them.

Tax Saving Fixed Deposits

Investment: Tax-deductible Accumulation: Taxable Withdrawal: Tax-free

That is, the Exempt – Taxed – Exempt or ETE regime is followed for these FDs.

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CBDT Clarification on Sec. 80CCD

F.No. 275/192/2009-IT (B) New Delhi Dated the 9th February, 2010.

Sub: Clarification regarding deduction in respect of contribution to pension scheme under Section 80 CCD – matter reg.

A number of representations have been received regarding deduction under Section 80 CCD for contribution made under pension scheme in the light of Circular No-1 /2010 dated 11th Jan62010 issued on the subject of Deduction of Tax at Source etc.

It is clarified that in accordance with the provisions of Section 80 CCD, deduction in respect of contribution made by an individual in the previous year to his account under a pension scheme notified, is allowed in computation of his total income –

(a)  in the case of an employee, ten per cent of his salary in the previous year; and

(b)  in any other case, ten per cent of his gross total income in the previous year.

2. It is further clarified that where the Central Government or any other employer makes any contribution to the account of employee for the pension scheme, the assessee shall also be allowed a deduction in the computation of his total income of the whole of the amount contributed by the Central Govt. or any other employer as does not exceed 10% of his salary in the previous year.

3. Salary for the purpose of above section (80 CCD) includes dearness allowance if the terms of employment so provide, but excludes all other allowances and perquisites.

4.It is further clarified that aggregate limit of deduction under this section (80CCD) along with Sections 80 C, 80 CCC shall not in any case exceed Rs. onelakh.

Yours faithfully,

(Ansuman I’attnaik)

Director (Budget)


To,

All DDOs of Central Government, State Governments, CAG & other persons as per standard list

Deduction in respect of contribution to pension scheme of Central Government.

8OCCD. (1) Where an assessee, being an individual employed by the Central Government 18[or any other employer] on or after the 1st day of January, 2004, 18a[orany other assessee, being an individual] has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited 18b[asdoes not exceed,-

(a) in the case of an employee, ten per cent of his salary in the previous year; and

(b) in any other case, ten per cent of his gross total income in the previous year.]

(2)   Where, in the case of an assessee referred to in sub-section (1), the Central Government 18[or any other employer] makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government 18c[or any other employer] as does not exceed ten per cent of his salary in the previous year.

(3)   Where any amount standing to the credit of the assessee in his account referred to in sub-section (1), in respect of which a deduction has been allowed under that sub-section or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year,—

(a)      on account of closure or his opting out of the pension scheme referred to in sub-section (1); or

(b)     as pension received from the annuity plan purchased or taken on such closure or opting out,

the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.

19[(4)Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (1),—

(a)      no rebate with reference to such amount shall be allowed under section 88 for any assessment year ending before the 1st day of April, 2006;

(b)     no deduction with reference to such amount shall be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.]

19a[(5) For the purposes of this section, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.]

Explanation.—For the purposes of this section, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.]

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Section 192 of the Income-tax Act 1961 – Deduction of tax at source – Salary -Income-tax deduction from salaries during the financial year 2009-10

CIRCULAR NO. 1/2010 [F. NO. 275/192/2009 IT(B)], DATED 11-1-2010

C. As per the provisions of section 80CCD, where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004, has in the previous year paid or deposited any amount in his account under a pension scheme as notified vide Notification No. F.N. 5/7/2003- ECB & PR, dated 22-12-2003, he shall be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed ten per cent of his salary in the previous year.

The benefit of new pension scheme has been extended to any other employees (also self-employed person) with retrospective effect from 1-4-2009 and deduction is allowed to employees up to 10 per cent of salary in the previous year and in other cases up to 10 per cent of his gross total income in the previous year. Further it has been specified that with retrospective effect from 1-4-2009 any amount received by the assessee from the new pension scheme shall be deemed not to have received in the previous year if such amount is used for purchasing an annuity plan in the previous year.

Where any amount standing to the credit of the assessee in his account under such pension scheme, in respect of which a deduction has been allowed as per the provisions discussed above, together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any financial year,

(a)   on account of closure or his opting out of such pension scheme; or

(b)     as pension received from the annuity plan purchased or taken on such closure or opting out,

the whole of the amount referred to in clause (a) or clause (b) above shall be deemed to be the income of the assessee or his nominee, as the case may be, in the financial year in which such amount is received, and shall accordingly be charged to tax as income of that financial year.

For the purposes of deduction under section 80CCD, salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

The aggregate amount of deduction under sections 80C, 80CCC and 80CCD shall not exceed Rs. 1,00,000 (section 80CCE).

NEW PENSION SCHEME – Details

Some questions and answers about New Pension Scheme (NPS)

1. What is the New Pension System (NPS)?

The NPS is a new contributory pension scheme introduced by the Central Government for its own new employees. Under the new pension system, each new central government employee will open a personal retirement account on joining service. Every month, and till the employee retires or leaves government service, a part of the employee’s salary will be transferred into this account. When the person retires, he will be able to use these savings to take care of the needs and expenses of his family during old age.

2. Who is covered by the NPS?

You are covered by the NPS if

a. You joined central government service on or after 01 January 2004, and

b. You are an employee of a Central (Civil) Ministry or Departments, or

c.  You are an employee of a non-civil Ministry or Department including Railways, Posts, Telecommunication or Armed Forces (Civil), or

d.You are an employee of an Autonomous Body, Grant-in-Aid Institution, Union Territory or any other undertaking whose employees are eligible to a pension from the Consolidated Fund of India.

3. If I joined Central Government service on or after 01 January 2004 do I have an option of not being covered by the NPS?

No. The NPS is mandatory for you.

4.I am covered by the NPS. Do the old Pension Rules apply to me?

No. The Central Civil Service Pension Rules (1972) do not apply to you. You are covered only by the New Pension System Rules framed for the NPS.

5.I am covered by the NPS. Can I contribute to the GPF?

No. The General Provident Fund (Central Service) Rules, 1960 also do not apply to you. You will not be permitted to contribute towards GPF.

6. Am covered by the NPS. Am I eligible to Gratuity?

No. You will not be eligible to Gratuity.

7. How does the NPS work?

When you join Government service, you will be allotted a unique Personal Pension Account Number (PPAN). This unique account number will remain the same for the rest of your life. You will be able to use this account and this unique PPAN from any location and also if you change your job. The PPAN will provide you with two personal accounts:

1. A mandatory Tier-I pension account, and

2. A voluntary Tier-II savings account.

8. What is the difference between Tier-I and Tier-II accounts?

1. Tier-I account: You will have to contribute 10% of your basic+DA+DP into your Tier-I (pension) account on a mandatory basis every month. You will not be allowed to withdraw your savings from this account till you retire at age 60. Your monthly contributions and your savings in this account, subject to a ceiling to be decided by the government, will be exempt from income tax. These savings will only be taxed when you withdraw them at retirement.

2. Tier-II account: This is simply a voluntary savings facility for you. Your contributions and savings in this account will not enjoy any tax advantages. But you will be free to withdraw your savings from this account whenever you wish.

9. How will I contribute to my Tier-I (pension) account?

Every month, the government will deduct 10% of your salary (basic+DA+DP) and automatically transfer this amount to your Tier-I account in your name.

10. Will the Government contribute anything to my Tier-I (pension) account?

Yes. As your employer, the Government will match your contribution (10% of basic+DA+DP) and transfer this amount also to your Tier-I account in your name.

11. Can I contribute more than 10 into my Tier-I account?

Yes. You will be permitted to contribute more than the mandated 10% of Basic+DA+DP into your Tier-I account – subject to any ceiling that may be decided by the Government.

12. Will the Government also contribute more than 10 into my Tier-I account?

No. The contribution of the Government will be limited to 10% of your basic+DA+DP.

13. What will happen if I am transferred to another city or country?

The PPAN number will stay the same and you will be able to use the same accounts from anywhere in the world.

14. If I leave Government service before I retire will the Government continue to contribute to my Tier-I account?

No. The 10% contribution by the Government will stop when you leave Government service. However, your savings in your Tier-I and Tier-II accounts will stay in your name and you will be able to continue using these accounts to save for your retirement.

15. What if I die or become permanently disabled during my service?

Pl. refer Office Memorandum: Additional Relief on death/ disability of Government servants covered by the NPS(New Pension Scheme) recruited on or after 1.1.2004 No.38/41/06/P&PW(A) Dated 5th May, 2009

16. Where will my savings be invested?

Each PFM will offer you a limited number of simple, standard schemes. You will be free to choose any of the following schemes for investing your savings:

Scheme A This scheme will invest mainly in Government bonds

Scheme B This scheme will invest mainly in corporate bonds and partly in equity and government bonds

Scheme C This scheme will invest mainly in equity and partly in government bonds and corporate bonds.

17. I am covered by the NPS. Do the old Pension Rules apply to me?

No. The Central Civil Service Pension Rules (1972) do not apply to you. You are covered only by the New Pension System Rules framed for the NPS.

18.I am covered by the NPS. Can I contribute to the GPF?

No. The General Provident Fund (Central Service) Rules, 1960 also do not apply to you. You will not be permitted to contribute towards GPF.

19. Who will be responsible for the NPS and for protecting my interests?

The Government is setting up a new dedicated regulatory authority. This will be named the Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA will be responsible for the NPS and for protecting your interests in the NPS.

20. When will my contributions start?

Your contributions (and the matching contribution by the Government) towards your Tier-I pension account will begin only from the month following the month in which you join Government service. During the first month of your service, you will be allotted the PPAN.(PRAN)

21. Who in the Government will issue me a PPAN open my accounts and be responsible for the deductions?

When you join service, your Drawing and Disbursement Officer (DDO) will instruct you to fill out a NPS form. You will be required to provide your full professional and personal details including details of your nominee in this form. The DDO will issue you the PPAN number(PRAN) and will also be responsible for all administrative matters related to your NPS accounts including deduction of your contributions, transferring your contributions and the matching contribution of the Government to your Tier-I pension account.

22. What will happen to my contributions to my Tier-I account?

Your monthly contributions, and the matching contributions by the Government into your Tier-I account, will be transferred by the Government in your name to a Pension Fund Manager (PFM). The PFM will invest your contributions on your behalf. In this way, your savings will earn an interest and grow over time.

23. Which agency will serve as a PFM?

The PFRDA will appoint a limited number of leading professional firms to act as PFMs. One of these PFMs will be a public sector agency.

24. Who will decide which PFM manages my contributions and savings?

You will select a PFM to manage your contributions and savings.

25. Will I be permitted to select more than one PFM to manage my savings?

Yes. If you wish, you will be able to spread your savings across multiple PFMs – where a part of your savings are managed by 2 or more PFMs.

26. Will I be permitted to change my PFM preference?

Yes. If you wish, you will be free to change the PFM and move all your savings to another PFM of your choice.

27. Where will my savings be invested?

Each PFM will offer you a limited number of simple, standard schemes. You will be free to choose any of the following schemes for investing your savings:

Scheme A This scheme will invest mainly in Government bonds

Scheme B This scheme will invest mainly in corporate bonds and partly in equity and government bonds

Scheme C This scheme will invest mainly in equity and partly in government bonds and corporate bonds

28. Will I be able to select more than one scheme?

Yes. You will be free to spread your savings across these three schemes. Whenever you decide, you will also be free to switch your savings from one scheme to another.

29. How will my contributions be transferred to the PFM and scheme selected by me?

You will specify the PFM and scheme to your DDO. The DDO will arrange for transfer of your contributions to the PFM(s) and scheme(s) that you have selected.

30. What rate of return will my contributions earn?

Your contributions will not earn any specified rate of return. The PFM will invest your savings in a scheme of your choice.The returns earned by the PFM on the scheme selected by you will be credited to your account.

31. Will I have to pay any fees or charges under NPS?

You will have to pay a fee to the Central Recordkeeping Agency (CRA) which will maintain your accounts and also to the PFM(s) which manage your savings. These charges will be deducted from your savings on a periodic basis. The fees and charges by the CRA and PFMs will be regulated by the PFRDA.

32. Can I contribute more than the 10 of basic+DA+DP into my TierI account at the moment?

No. You will be allowed to do so only when the PFRDA, CRA and PFMs are appointed.

33. What will happen to my contributions and earnings in my Tier-I account when the PFRDA CRA and PFMs etc. are appointed?

Your full contributions, matching contributions by the Government, and the interest earned on the same will be transferred in your name to the PFM and scheme selected by you.

34. Will I have the option of continuing with the current 8 percent rate of return?

No. Once your savings are transferred to the PFM, your savings will enjoy only the rate of return earned by the PFM on scheme you have selected.

35. When will I be permitted to withdraw from my Tier-I account? You will be able to withdraw your savings in your Tier-I account at age 60. 36. What will happen to my savings in the Tier-I account when I retire?

You will be able to withdraw 60% of your savings as a lumpsum when you retire. You will be required to use the balance 40% of your savings to purchase an annuity scheme from a life insurance company of your choice. The life insurance company will pay you a monthly pension for the rest of your life.

37. Can I use more than 40 of my savings to purchase the annuity?

Yes.

38. What will happen to my savings if I decide to retire before age 60?

You will be required to use 80% of your savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20% of your savings as a lumpsum.

39. Will the annuity also provide a family (survivor) pension?

Yes. You will have an option of selecting an annuity which will pay a survivor pension to your spouse.

40. What will happen to my savings if I decide to retire before age 60?

You will be required to use 80% of your savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20% of your savings as a lumpsum.

41. What will happen to my savings in the Tier-I account when I retire?

You will be able to withdraw 60% of your savings as a lumpsum when you retire. You will be required to use the balance 40% of your savings to purchase an annuity scheme from a life insurance company of your choice. The life insurance company will pay you a monthly pension for the rest of your life.

42. What if I die or become permanently disabled during my service?

The Government is yet to issue any guidelines on this.

43. Will I have to pay any fees or charges under NPS?

You will have to pay a fee to the Central Recordkeeping Agency (CRA) which will maintain your accounts and also to the PFM(s) which manage your savings. These charges will be deducted from your savings on a periodic basis. The fees and charges by the CRA and PFMs will be regulated by the PFRDA.

44. What will happen to my contributions to my Tier-I account?

Your monthly contributions, and the matching contributions by the Government into your Tier-I account, will be transferred by the Government in your name to a Pension Fund Manager (PFM). The PFM will invest your contributions on your behalf. In this way, your savings will earn an interest and grow over time.

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Authored By-

1. M. K. Shah Advocate  2.  CA Bhupesh Kumar Shah

11/3, Butler Road, Dalibagh, Lucknow- 226001

Email- bhu790@yahoo.com

Author 1 is a practicing income tax lawyer at Lucknow-UP

Author 2 is a member of the institute of Chartered Accountants of India

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