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New Pension Scheme (DCPS) and Tax Deductions.

The New Pension Scheme works on defined contribution basis and will have two tiers – Tier-I and II.  Contribution to Tier-I is mandatory for all Government servants joining Government service on or after 1-1-2004 (Maharashtra State (DCPS)  w.e.f. 01.11.2011) (except the armed forces in the first stage), whereas Tier-II will be optional and at the discretion of Government servants.

Employee’s Contribution:
Deduction is available under section 80CCD(1) in respect of employee’s contribution in the year in which contribution is made. However no deduction is available in respect of Employee’s contribution, which is in excess of 10% of the salary of the Employee.

Employer’s contribution:
Employer’s contribution to NPS is taxable as salary income in the year of contribution. However, Deduction available is under section 80CCD(2) in respect of employer’s contribution- Contribution by employer to NPS is deductible in hands of the concerned employee in the year in which contribution is made. However, no deduction is available in respect of employer’s contribution which is in excess of 10% of the salary of the employee.

Deduction & Taxability:
Employer & Employee contribution forms part of the income of the salaried assessee as mentioned above. Both the contributions are eligible for deduction u/s 80CCD read with section 80C of the IT Act. The aggregate amount of deduction under section 80C, 80CCC and 80CCD cannot exceed Rs. 1,00,000/-.

Other Information:
Pension (or any other payment) out of NPS account (for which deduction has been claimed under section 80CCD) will be taxable in the hands of recipient. If, however, the amount of pension received from NPS is used for purchasing an annuity plan in the same previous year, then it will be exempt from tax.

For calculating 10% limit for the above purpose, “salary” includes dearness allowance, which will be deducted from his salary bill every month by the PAO concerned.  The Government will make an equal matching contribution.  However, there will be no contribution from the Government in respect of individuals who are not Government employees.