It has been observed that certain taxpayers are still ignorant of the benefits associated with contribution to  pension funds. Contribution to certain “pension funds” and contribution to “pension scheme” of Central Government are eligible for deduction under the Income tax Act.

Tax Treatment of the amount contributed and interest accrued

• It is a well known fact that the deduction under section 80CCD is based on 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. But the receipts from NPS will not be taxable if they are used for purchasing an annuity plan within the same financial year.
• All individuals (employees and self employed) will be allowed deduction for any contribution to NPS subject to a maximum of 10% of salary or gross total income, as the case may be.
• The deduction shall be allowed within the aggregate ceiling limit of Rs.100000 taking into account deductions u/s 80C, 80CCC and 80CCD.
• Employer’s contribution to a maximum of 10% of salary is fully allowable under this section and shall not be counted for computing the overall limit of Rs.100000. Employer’s contribution will be fully taxable in the hand of employee as perquisite. Thereafter the employee can claim deduction for the same under 80CCD.

Tax Treatment of the amount received on maturity

The total contribution in the pension scheme and the value of the account depends on factors like quantum of money deposited, the asset classes opted for investment and the returns generated by the pension fund manager.

• On completion of 60 years of age, it is compulsory to purchase an annuity for an amount equal to minimum of 40% of the accumulated balance in your NPS account. The money which is left after purchase of annuity, is exempt from tax up to the extent of 40% of the accumulated wealth.
•  In case you want to withdraw the money before you complete 60 years of age, then it is compulsory to purchase an annuity for an amount equal to minimum of 80% of the balance at the time of withdrawal. In case of untimely death of the NPS account holder before completion of 60 years of age, then the money received by the nominee or legal heirs is fully exempt.

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