The New Pension Scheme (NPS) is a pension scheme launched by the Government of India to offer pension scheme for unorganized sectors. According to the scheme, employees appointed on or after January 1, 2004 and in state employees appointed on or after November 1, 2005 will contribute 10% of their Basic pay, Grade Pay and Dearness Allowance (DA) towards the Pension Fund Regulatory and Development Authority. Employer will contribute the equal amount. This scheme has been kept voluntary for the Indian citizens but mandatory for government employees.
According to new Section 36 (1)(iva) of the finance act 2011, w.e.f assessment year 2012-13, assessee (employers) will get deduction towards his contribution made under the pension scheme referred in Section 80CCD of the Act on account of an employee up to 10% of the salary of the employee in the previous year.
As of now, contribution made by an employer towards a recognized provident fund, an approved superannuation fund or an approved gratuity fund is allowable as a deduction from business income under Section 36, subject to certain limits. But contribution to the New Pension Scheme (NPS) is not allowed as a deduction for an employer.
Advantages Of New Pension Scheme
- The newly inserted clause will offer tax deduction to employers on contributing towards the pension scheme of the their employees which will boost NPS scheme implementation.
- Employees will get equivalent contribution from their employers towards their pension scheme.
- Proposed DTC is expected to offer EEE method of taxation on NPS which will make contribution, interest and withdrawal tax free for investors.
Now the newly inserted clause under section 36 allows employers to take the amount paid as contribution towards the pension scheme of an employee upto the max limit of 10% of the salary of the employee in the previous year, shall be allowed as deduction in computing the income under the head ‘Profits and gains of business or profession’.
As per the Finance Act, 2011 that contribution made by the Central Government or any other employer to NPS shall be excluded while computing the limit of Rs 1 lakh. However the contribution made by the employee to the NPS will be subject to the limit of Rs 1 lakh.
The proposed DTC is expected to offer EEE method of taxation over NPS under which contribution, interest and withdrawal all will be exempt from tax for the investors. Which is an another booster for investors to invest under NPS.