Government of India in the year 2004 announced a New Pension Scheme.  Section 80CCD was brought in to provide that where an individual employed by central government or any employer deposits in any previous year any amount in his account under New Pension Scheme notified by the central government, then such individual shall be allowed deduction in computation of his total income of the amount deposited in the scheme subject to a maximum of 10% of his salary in the previous year.

Finance Act, 2009 has extended the benefits on New Pension Scheme to self employed persons also. Accordingly, section 80CCD is amended to provide that if any individual not being employed by any employer, deposits any amount in his account under the New Pension Scheme, in any previous year then such individual shall be allowed deduction in computation of his total income of the amount deposited in the scheme subject to a maximum of 10% of his salary in the previous year.

New Pension Scheme is optional and NPS Trust has been set up to manage the assets and funds of NPS.

The deduction under section 80CCD is based on formula of EET (Exempt, Exempt, Taxable) i.e. contribution made to NPS are excluded from Total Income; accrual of income is exempt; and receipts from NPS shall be taxed in the year of receipt.

To make NPS Trust a complete pass through (for income tax purposes) and to provide clarity on receipt based taxation, the Finance Act, 2009 has made the following amendment:

• Section 10(44) is inserted to provide that income received by NPS Trust is exempt from tax.
• Section 115-O (1A) is amended to provide that dividend paid to NPS Trust is not liable to Dividend Distribution Tax. If accordingly NPS Trust invests in shares of Tata Steel Co. and Tata Steel Co. declares a dividend of Rs. 100 crores out of which Rs.7 crores is payable to NPS Trust, then Tata Steel Co. will pay CDT on Rs. 93 crores. Needless to say that dividend of Rs. 7 Crores received by NPS Trust is exempt in its hands.
• Chapter VII of Finance Act, 2004 has also been amended to provide that all purchases and sales of equity and derivatives by the NPS Trust are also exempt from the Securities Transaction Tax.
• Chapter of TDS is amended to provide that NPS Trust will receive all the incomes without deduction of tax at source. (Section 197A amended).
• The benefit of new pension scheme has been extended to self employed individuals.
• Any amount received by the individual or his nominee from NPS Trust shall be taxable in his hands. However, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.

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