There are many conflicting views on the budget. A certain section – 80 CCD – has been amended, clarifying that it is available to private sector employees as well.
This has been taken many to believe that private sector employees can get an additional Rs. 100,000 if they invest in the New Pension Scheme (NPS). This is incorrect.
I believe that:
In my view, what’s happened is:
Now, the technical details.
The current section reads like this:
80CCD. (1) Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004, or any other assessee, being an individual has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—
(a) in the case of an employee, ten per cent of his salary in the previous year; and
(b) in any other case, ten per cent of his gross total income in the previous year.]
(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed ten per cent of his salary in the previous year.
This, was already pretty clear. If you were a self employed or otherwise employed individual, the sub-section (1) allowed you to contribute money into the NPS. (which is the “notified pension scheme” mentioned above). The amount
This has to be read along with Section 80 CCE which says:
Meaning: Everything put together that YOU contribute (not your employer) is clubbed together, and gets an aggregate limit of Rs. 100,000.
Meaning, if you earned Rs. 100,000 a month, and you contributed Rs. 10,000 to the NPS, and your employer contributed another Rs. 10,000, then:
The finance bill changes the 80C, and 80CCE limit to Rs. 150,000. But it also changes the 80 CCD section like this:
28. In section 80CCD of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2015,––
(i) for the words, figures and letters “Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004”, the words, figures and letters “Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004 or, being an individual employed by any other employer”
shall be substituted;
(ii) after sub-section (1), the following sub-section shall be inserted, namely:––
“(1A) The amount of deduction under sub-section (1) shall not exceed one hundred thousand rupees.”.
The first part basically clarifies that you can be employed anywhere. (In fact you can even be self employed, because the “or any other individual” continues to stay).
The second part is critical. It says that amount YOU contribute (which is what is subsection(1) is) is only deductible upto Rs. 100,000.
NPS contributions may be exempt, but they are one instrument where exits are taxed. Whatever money you received – whether as a lumpsum or a pension – is added to your income and taxed accordingly.
So in that context, a Provident Fund is better – since there is no taxation on exit. Hopefully a future finance minister won’t change that!
You can tell your employer to put 10% of your salary into the NPS into your account, but you should only contribute the minimum (Rs. 12,000 per year). You can then use the rest of the 138,000 to do the other 80C investments – like PPF or ELSS funds or such.
The employer’s contribution is exempt and taxable only on exit. Then, you wait until some finance minister gets itchy and makes NPS exits tax free. Which will happen when some senior tax officials begin to retire (I would imagine around 2020). Then you can get out tax-free also.
This could have been done last year also – it’s not anything new in this budget. Until NPS exits are made exempt, they compare poorly with a PPF.