Contributions to National Pension System (NPS) u/s 80CCD(1B)

Article explains Legislative history of Section 80CCD(1B) which related to deduction for contribution to National Pension Scheme (NPS), Relaxations provided in subsequent Finance Acts under Section 80CCD(1B), Summary of Provisions related to NPS Deduction under Section 80CCD(1B), Extract of Section 80CCD related to Deduction in respect of contribution to pension scheme of Central Government and Extract of Section 10(12A) and Section 10(12B).

Legislative history:

Finance Act, 2015 a new subsection (1B) has been inserted in Section 80CCD of the Income Tax Act, 1961.  As per the new section individual assesses whether employee or not can claim deduction up to fifty thousand rupees towards contribution made during the Financial Year to NPS over and above Rs. 150000 as available u/s 80C, 80CCC and 80CCD(1). 

When the sub section was introduced, the scheme was in EET Mode ie., Exempt, Exempt and Tax mode.

1. Monthly/periodic contributions to NPS during the accumulation phase are allowed as deduction from income for tax purposes.

2. the returns generated on these contributions during the accumulation phase are also exempt from tax.

3. the terminal benefits on exit or superannuation, in the form of lump sum withdrawals, are taxable in the hands of the individual subscriber or his nominee in the year of receipt of such amounts. However as per subsection 5 to Section 80CCD, if the amount is used for purchasing an annuity plan in the same financial year such amount is not treated as income for income tax purposes.

Relaxations provided in subsequent Finance Acts under Section 80CCD(1B)

1. Amount received by the nominee on account of closure or opting out of the NPS, on the death of the assessee is not taxable (Finance Act, 2016).

2. In case individual being employee wants to

• close account or opting out of the NPS, then 60% of the total amount payable is exempt.
• Withdraw partial amount out of his accounts, then 25% of the contributions made is exempt.

The 40% relaxation is further proposed to extend to all individual assesses who have subscribed to the NPS vide Finance Bill, 2018. 

Summary of Provisions related to NPS Deduction under Section 80CCD(1B)

The extract of relevant sections in the statute book in reproduced below for ready reference:

Extract of Section 80CCD – Deduction in respect of contribution to pension scheme of Central Government:

“(1) Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004 or, being an individual employed by any other employer, or any 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 as does 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, 20 per cent of his gross total income in the previous year.

(1A) [***]

(1B) An assessee referred to in sub-section (1), shall be allowed a deduction in computation of his total income, whether or not any deductions is allowed under sub-section (1), of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified or as may be notified by the Central Government, which shall not exceed fifty thousand rupees:

Provided that no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1).

(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government 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 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) or sub-section (1B), in respect of which a deduction has been allowed under those sub-sections 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 subsection (1B); 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:

Provided that the amount received by the nominee, on the death of the assessee, under the circumstances referred to in clause (a), shall not be deemed to be the income of the nominee.

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

(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.

(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.”

Extract of Section 10 – Incomes not included in total income [After amendment by Finance Bill, 2019]:

(12A) any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed sixty per cent of the total amount payable to him at the time of such closure or his opting out of the scheme;

(12B) any payment from the National Pension System Trust to an employee under the pension scheme referred to in section 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder, to the extent it does not exceed twenty-five per cent of the amount of contributions made by him;

Disclaimer: The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions.

(Republished with Amendments)