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Deduction u/s pension scheme worthy or not as per income tax

CA Prashant Gupta , Last updated: 08 May 2013  
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Any individual can deposit contribution to Notified Pension Scheme by central Government. If person is employed then his contribution will get deduction u/s 80CCD (1) and employer contribution will get deduction u/s 80CCD (2). Any self employed can also contribute in this scheme.

Amount of deduction: only 10% of salary will be available to employee share and 10% to employer share. BUT one condition employer share will be added in salary then it will get deduction. If a self employed contributed in this scheme then he will get 10% of his gross total income.

Total deduction: as per sec 80CCE the aggregate of 80C, 80CCC and 80CCD (1) shall not, in any case, exceed 1 lakh.   80CCD (2) is not included in this. (Before FY. 2011-12 employer contribution was also included in 1 lakh limit) So if employer contributes in this scheme then his deduction will be extra. But whether it is beneficial to employee or not?

We can understand this by below example:

If any employee is getting salary 5,00,000. He is contributing 10% in NPS. His employer is also contributing 10%. He is depositing 70,000 in PPF and 20000 in LIC.

Situation 2: employee share is 12% and employer share is 10%

Situation 3: employee share is 10% and employer share is 12%

Situation 1

Situation 2

Situation 3

Salary

5,00,000

5,00,000

5,00,000

Employer’s contribution to NPS

50,000

50,000

60000

Gross Total Income

5,50,000

5,50,000

5,60,000

Less: 80C PPF

70,000

70,000

70,000

 LIC

20,000

20,000

20,000

80CCD (1)

50,000

50,000

50,000

80CCD (2)

50,000

50,000

50,000

Max deduction 80CCE

1,50,000

1,50,000

1,50,000

Net Income

4,00,000

4,00,000

4,10,000

So its clear, as per income tax this scheme is not beneficial for employees. If in above example if there is RPF (Recognised Provident fund) instead of NPS then employer contribution will not be added in salary. So even employer contribution didn’t get extra deduction it would be more beneficial.

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Published by

CA Prashant Gupta
(DGM (F & A))
Category Income Tax   Report

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