Income Tax benefits out of Government Contributions in NPS
In the Budget 2011, finance minister announced that during the financial year 2011-12 (Assessment year 2012-13) an employer can invest up to 10% of the Cost to Company for employment of an employee (salary of the employee ) in New Pension Scheme, in the name of the employee, which will be exempted from Income Tax. Both the employer as well as employee need not pay any income tax on this amount.
This concession is obviously extended to promote New Pension Scheme among Private Sector Employees. Though the the term "Employer" is General, this concession may not be useful for Government Employees who are not coming under New Pension Scheme as Government will contribute 10% of salary in NPS account, only in respect of employees who joined in Government Service on after 1.1.2004.
For Private Sector Employees who were not provided New Pension Scheme facility by their employers, this new concession may be very useful as more private employers may be inclined to set aside a portion of Employees package for NPS contribution by the company and deducting the same from respective employee's salary package.
By this method, the employer is not going to loose anything as the cost involved for employment of an employee, which is popularly called as CTC salary package (Cost to Company Salary Package) is not going to increase.
From the view point of the employee, this will be win-win situation as he is not going to loose anything from his CTC salary package since what was deducted from his annual salary package will be invested by the employer in employee's New Pension Scheme account.
At the same time, employee is going to be benefited by the Tax exemption on the amount of NPS contribution as neither he nor his employer is going to pay any tax on the said NPS contribution.
For example if CTC salary package of an employee is Rs.5 lakhs, he can insist his employer to contribute 10% of the same in New Pension Scheme in his (employee's) name, so that his income tax liability will be restricted to the income of only Rs.4.50 lakhs as his employer is going to invest Rs.50,000 in his (employee's) NPS Account, by deducting from employee's annual CTC salary package.
This amount will not be taxed to employers also as the employers can claim these contributions as business expenses made by them. Also, the individual will not have to pay any tax on this amount being deposited by the employer and this investment would also not form a part of the limit of Rs. 1 lakh under the section 80-C.
Though this may be a good tax saving idea for Salaried Class other than Government Employees we wanted you to share this useful idea to your friends and relatives who are working in Private Sector.
For Government Employees coming under New Pension Scheme, this concession will be definitely useful as contribution in NPS by Government was coming under restriction of Rs.1 lakh savings clause in Section 80C, 80 CC, and 80CCD of Income Tax Act in the previous Years.
For more details on this aspect please check the following link for detailed previous article of GConnect on this issue