Home/ Budget 2019 / News/  Higher income tax deduction on NPS likely for private sector employees

In the Budget 2021, tax experts expect the government to fix some anomalies in the NPS with regard to income tax benefits. They say that this will help in increasing the attractiveness of the National Pension Scheme.

"For contribution towards Tier I account up to 14% of the employer’s contribution is permitted for central government employees but when it comes to other employees maximum up to 10% of the contribution from employer is eligible for deduction under Section 80CCD(2). The government should introduce amendments to take care of these anomalies to make the scheme just and fair for each category of subscribers," said Balwant Jain, an investment and tax expert.

Under the current income tax laws, if an employer is contributing towards the employee's NPS account, a deduction up to a certain percentage of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). For central government employees, it is 14% of salary and for others, the limit is 10%.

There is also an expectation to increase the quantum of exemption for employer contribution from 10% of salary to 14% on the lines of what is being provided to government employees, says Saraswathi Kasturirangan, partner at Deloitte.

There are many other anomalies in the NPS scheme which the government should work on in the budget to be presented on 1st February, said Balwant Jain.

"The government should immediately bring in clarity about taxation of withdrawals from Tier II account of NPS so that the subscriber is not left at the discretion of the assessing officer. The withdrawals from Tier I are tax-free and the balance 40% has to be used to buying an annuity. But there is no provision about how the withdrawals from Tier II account should be taxed since these are not the mutual fund products for which there exist exact rules. Complete clarity will go a long way in clearing the clouds around tier II account taxation," he said.

"For contribution towards tier II account only the Central Government employees are allowed to claim deduction under Section 80 C with a lock-in period of three years. The same option is not available to other subscribers," he added.

Currently, a central government employee's contribution towards Tier-II account of NPS for availing income tax deduction (up to 1.5 lakh) per year will have a lock-in period of 3 years.

"All the eligible subscribers should be allowed the benefit of tax benefit towards Tier II account specially when this offers less risky option where subscriber can opt for a debt portion of 100% making it less risky as compared to other product available of the same time tenure i.e. ELSS or Equity Linked Savings Schemes," he said.

Mr Jain also says that the government should bring in parity between tax treatment of employee provident fund and NPS at the time of maturity. "The maturity proceeds of EPF are fully tax-free and the subscriber is free to invest the money the way he wishes. However, the NPS subscriber can only withdraw upto 60% of the accumulated balance in his NPS account at the time of retirement and for the balance he has to mandatorily buy an annuity from any life insurance company registered with IRDA," he added.

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Updated: 08 Jan 2021, 08:46 AM IST
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