To make the New Pension System more attractive Government has announced two major Income tax concessions for contributions made in New Pension Scheme in the budget 2011.

More Tax benefits to New Pension Scheme

tax exemption for nps, nps employer contributionTo make the New Pension System more attractive Government has announced two major Income tax concessions for contributions made in New Pension Scheme in the budget 2011.

While the NPS subscribers are directly benefited from one of these Income tax concessions, the second one is beneficial to the employers who contribute for NPS each month equivalent to employees contribution in Tier I.

Income tax concession to Employees under NPS:

So far, the contribution made by a New Pension Scheme subscriber in Tier I scheme is deductible from the total income under Section 80CCD of the Income Tax Act.  Like wise, the contribution made by the employer for the employee in Tier I of New pension scheme is also deductible under Section 80CCD.  However, the aggregate deduction under Section 80C, 80CCC and 80CCD is fixed at Rs.1 lakh. 

So, if the NPS subscriber is already having other eligible deductions such as LIC premium, PPF, bank or NSC deposits, ELSS etc., under Section 80C, 80CCC and Section 80CCD., deduction allowed under Section 80CCD in respect of contribution towards New Pension Scheme may not be of much useful as the overall limit of savings eligible for deduction is pegged at Rs. 1 lakh.  

Further, contribution made by the employer in Tier I New pension scheme should also be included in the Total income of NPS subscriber as far as calculation of income tax is concerned, while full deduction of the

same from income under Section 80CCD may not be possible as other savings made by the subscriber covers the overall limit of Rs.1 lakh under Section 80CCD.  Hence, for a NPS subscriber contribution for NPS by the Government is taxable in most of the cases.

For example, if an employee receives a salary of Rs.40,000 (pay+da), 10% of the same (Rs.4000) is paid by him as contribution towards NPS.  The Government will also be paying Rs.4000 in this case in NPS fund of the said employee.  Until now, an amount of Rs.96,000 (Rs.48,000+Rs.48000) could be deductible from the total income as far as this employee is concerned under Section 80CCD. 

However, if the said employee has been paying LIC premium of Rs.20,000 per year, he will be allowed to deduct only Rs.2000 in respect of the same under Section 80CC as total ceiling of Rs.1,00,000 under Section 80CCE will apply in this case.  So, an eligible deduction of Rs.18,000 could not be availed under Section 80CCD.  In other words, employer contribution to NPS to an extent of Rs.18,000, which is already included in the income is taxable in this case.

However, budget 2011 has proposed to amend section 80CCE so as to provide that the contribution made by the Central Government or any other employer to a pension scheme under section 80CCD shall be excluded from the limit of one lakh rupees provided under section 80CCE.  It is exepected that this proposal which will be effective from the assessment year 2012-13 (financial year 2011-12) would totally exempt employer's contribution in NPS from levying income tax.

Income tax concession to Employers under NPS:

Currently, the contribution made by an employer towards a recognised 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. However, the contribution made by an employer to the NPS is not allowed as a deduction.

In the Budget for the financial year 2011-12, it is proposed to amend section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme including New Pension Scheme (NPS) to the extent it does not exceed ten per cent of the salary of the employee, shall be allowed as deduction in computing the income under the head “Profits and gains of business or profession”.

This amendment will be effective from 1st April, 2012 and will be applicable to the assessment year 2012-13 (for the income earned in the financial year 2011-12) and subsequent years.

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  1. I have read the view of Col Lamba above , I think that Col is getting low salary as they expecting. Could you explain what is difference sacrifice of Jawan and a Officer (Col or Brig etc). Jawan is laying -4 degree temperature with their armament and more ever half of the life without family. And an officer is (col or Brig) sleeps with full comfort with their family. Whole life they are having their children with them. Two or three jawans working as ARDALI for them. Have you think a second for your Jawans. I think you also don’t know that in civil a 4th grade employee (Sweeper, peon, ets ) getting 1800 rs Grade pay and your Jawan is getting 1900 Gr pay. Jawan sacrifice costs Rs 100. Have you ever fight for them. In 4th CPC there was no pay for a GC or Mid Ship man only a fixed stipends was paid. But now they are getting pay. Every time when pay commission visit only officer represents. Jawans never interacts with Pay commission. If you threaten mutiny / strike etc. One day if less paid Jawans think over that than it will be great trouble . Andhar Nagre Chupat Raja.
    You people have good lawyer can represent your case while a Jawan can’t speak in front of you people how they represent so please represent for them also. Very very less paid Jawans won three major wars and nobody stands for them. Def officers always fight for themselves hence now a Col is quoting that a sub Inspector will much higher regarding pay/pension. Because in Police and other civil body their officer fights for their subordinate and a sub inspector getting this opportunity to go upto DSP. Ab bhi Jaag Jai. Jawano ke socho. Apne liye to Pashu Pakshi sabhi jite hai dusro ke liye jiye to manav kahlata hai.
    At last my submission to Govt that after so many letter issued from Central Govt still Def personnel nto getting pay protection while after retirement they starts IInd innings with Central State Govt. Only Banks had implemented pay protection. Mostly corporation/autonomous body and Govt body have not implemented. While a def person joins new job , he produce all the documents. It is my submission that on the joining his pay should be fix as per pay protection rule.

  2. Dear Sir
    Thank you for reply
    it means suppose eligible subn is rs. 1 lakh. and 10 % of employer contribution (suppose emplyer total salary is Rs.10 lakh than 10% of 10 lakh i.e. rs.1 lakh therefore total 2 lakh will be deducted from total salary is this correct ? pl reply. sorry for trouble. Thank you.

  3. Dear Sir
    Can anybody pl explain by giving an example that how NPS scheme is beneficial for Income tax benefit.somewhere it is written only Rs.1lakh is only dudectible under 80c,80cc,80ccd, some body saying that Rs.1 lakh under 80c,80cc,80ccd and Rs.1 lakh from employer contribution that means Rs.2/- lakh is allowable deduction from the total income. pl help and reply by giving an example.

  4. the details of New Pension Scheme is super

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