Can Manda­tory Con­tri­bu­tion to NPS Fetch New Tax Ben­e­fit?

As tax ex­perts come out with dif­fer­ent in­ter­pre­ta­tions of rules gov­ern­ing ad­di­tional de­duc­tion

The Economic Times - - Companies: Pursuit Of Profit -

Ben­galuru: Ex­perts are di­vided over how tax­pay­ers can claim the ad­di­tional tax de­duc­tion for NPS con­tri­bu­tions an­nounced in last year’s Bud­get. Some tax ex­perts claim that em­ploy­ees cov­ered by NPS can claim de­duc­tion for their manda­tory con­tri­bu­tions un­der the new Sec 80CCD(1b). “An em­ployee’s manda­tory con­tri­bu­tion to NPS is el­i­gi­ble for de­duc­tion un­der Sec­tion 80CCD (1b),” says Ar­chit Gupta, founder, ClearTax.in.

This means tax­pay­ers cov­ered by NPS will not have to make ad­di­tional in­vest­ments to claim the new de­duc­tion. Other tax-sav­ing in­vest­ments and ex­penses, such as home loan prin­ci­pal, chil­dren’s tu­ition fees, life in­surance pre­mium, NSCs and ELSS funds, can be claimed un­der Sec­tion 80C while the manda­tory con­tri­bu­tion to NPS can be claimed un­der Sec 80CCD (1b).

“If you have con­trib­uted ₹ 50,000 or more to­wards NPS via salary de­duc­tions, max­imise the tax ben­e­fits un­der both Sec 80C and Sec 80CCD(1b). Claim the full ₹ 50,000 un­der the new sec­tion first and the resid­ual can be ad­justed to achieve to­tal tax de­duc­tion of ₹ 2 lakh,” says Gupta of Cleartax.in.

An­other in­ter­pre­ta­tion says that

the manda­tory con­tri­bu­tion can be claimed un­der the new sec­tion only if it ex­ceeds the ₹ 1.5 lakh limit un­der Sec 80CCD(1). High in­come earn­ers cov­ered by NPS stand to ben­e­fit from this in­ter­pre­ta­tion. If the tax­payer contributes more than ₹ 1.5 lakh in a year to the NPS, the ex­cess amount above ₹ 1.5 lakh can be treated as vol­un­tary in­vest­ment and claimed as a de­duc­tion un­der the new Sec 80CCD(1b).

“Tax­pay­ers have the flex­i­bil­ity to choose the sub-sec­tions un­der which they want to claim the de­duc­tion. All they have to spec­ify is that the de­duc­tion claimed is for their own con­tri­bu­tions and there is no du­pli­ca­tion in th­ese claims,” says Vaib­hav San­kla, di­rec­tor, H&R Block.

How­ever, oth­ers be­lieve that the manda­tory con­tri­bu­tion to re­tire- ment sav­ings made by the in­di­vid­ual will not fetch him the new de­duc­tion an­nounced last year. For that, the tax­payer must make an ad­di­tional ‘vol­un­tary’ or ‘self con­tri­bu­tion’ to the NPS.

In­come tax laws al­low tax de­duc­tion for con­tri­bu­tions to NPS un­der three sec­tions. One, the em­ployee’s con­tri­bu­tion un­der Sec­tion 80CCD(1).

This de­duc­tion is un­der the over­all ₹ 1.5 lakh limit un­der Sec­tion 80C. Two, up to 10% of the ba­sic salary put into the NPS by the com­pany on be­half of the em­ployee is de­ductible with­out any limit. The third is the new Sec­tion 80CCD(1B) un­der which a tax­payer can claim de­duc­tion for vol­un­tary con­tri­bu­tion of up to ₹ 50,000. The new tax re­turn forms have done lit­tle to dis­pel the con­fu­sion.

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