Can Mandatory Contribution to NPS Fetch New Tax Benefit?
As tax experts come out with different interpretations of rules governing additional deduction
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.