All you wanted to know about additional dedcution of Rs. 50,000/- for NPS

My colleague Susan, who is retiring this year, was advised to deposit Rs. 50,000/- in NPS account this year to reduce her tax liability. She approached me for guidance. Based on my interaction with her I realised that the people generally do not know much about the NPS scheme in general and about this additional deduction of Rs. 50,000/- in particular. So I decided to write this article to explain both the points.

Who can open NPS account

Any individual who is citizen of India aged between 18-60  years can open NPS account. Even an NRI can open an NPS account whereas they are not allowed to open a PPF account or extend the existing PPF account after becoming NRI. People generally put the EPS and NPS on parity and feel that they can not open this account unless their employer offers them the facility. This is not true. Any individual including a self employed person can open NPS account. So even if your employer has not implemented NPS scheme, you yourself can open the account and contribute to it, as contribution of employer is not mandatory for opening and maintaining this account. You can  open NPS account even if you are already contributing towards employee provident funds or public provident  funds.

Type and Tenure of the account

Under the scheme of NPS you can open two types of account i.e. Tier I and Tier II. Opening of Tier I account is mandatory and it is the NPS proper account. The tax benefits and restriction about tenure apply to this account only. Tier II account is voluntary and can be used to park your surplus funds pending withdrawal or transfer to Tier I account.

NPS account does not have any fixed tenure but the age up to  which you can join this account is restricted before you complete 60 years of age.  However if you want to contribute beyond the age of 60 years, as per the revised regulations notified last year , you can do so till 70 years of age provided you have given advance notice of such intention. In case you do not want to extend the contribution period, once you complete the age of 60 years, you  have to mandatorily withdraw 40% of the accumulated balance for purchase of an annuity from a Life Insurance Company in India.  The balance 60% is allowed to remain in the account which can be withdrawn anytime before you complete 70 years. The account has to be closed on completion of 70 years of age. The condition as to purchase of annuity from 40% of the corpus does not apply in case the total corpus does not exceed 2 lacs age the time you reach 60 years, in which case you can fully withdraw the balance outstanding in your account.

Tax benefits for contribution.

The tax benefits for a salaried person are available only for contribution upto 10% of his salary towards NPS within the overall limit of Rs. 1,50,000/- along with other eligible items like Life Insurance premium, school fee, repayment of home loan, NSC, PPF, repayment of home loan, ELSS etc.  In case you are self employed you can contribute to Tier I account upto 10% of your gross total income i.e. income before deductions under various Section like 80C, 80 CCD, 80 CCC, 80 D, 80 E, 80 TTA . The overall deduction available shall not exceed Rs. 1,50,000/-. For self employed the limit of 10% is proposed to be increased to 20% from next year.

Last year's  budget had provided for an additional deduction of Rs. 50,000/- for contribution towards NPS account and in respect of which a lots of confusion is prevailing. This is in addition to the existing limit of 1,50,000/-.  Let us understand this with example. Suppose aggregate of all the eligible items of deduction exceeds 1.50 lacs,  your eligibility will be restricted to Rs. 1.50. However in case if it includes any amount of your contribution of NPS which gets excluded due to this limit of Rs. 1.50 , you will be able to claim the deduction for the NPS contribution which gets so excluded upto Rs. 50,000/- from current financial year. So in case you exhaust your limit of Rs. 1.5 lacs without even taking into account NPS contribution, you can claim extra deduction for NPS upto Rs. 50,000/-. For those of you who have not yet opened their NPS account, as the limit of Rs. 1.50 lacs was getting exhausted due to other regular items, can open NPS Tier I account and claim tax benefits by depositing upto Rs. 50,000/-.. It is interesting to note that limit of 10% of salary or Gross Total income does not apply to this additional contribution of Rs. 50,000/- so for those of you who were contributing over 10% of the limit but in excess of Rs. 1.50 lacs in monetary terms  can claim the same under the new provision without actually having to make any additional contribution.

As far as contribution of the employer is concerned, the above limits of Rs. 1.50 lacs or Rs. 50,000/- do not apply and any contribution by your employer is fully deductible without any monetary cap as long as it does not exceed 10% of your salary.

Tax treatment on Maturity

Since you have to compulsorily buy an annuity for 40% of the accumulated balance on your reaching  60 years or extended period, this 40% does not become taxable at the this stage but the annuity as and when received becomes taxable under the head “Income from other sources”. Out of the  withdrawal of the balance 60% of the corpus 40% is exempt and the balance 20% will become taxable as and when you withdraw it. However if you decide to buy annuity form  60% of the corpus at retirement you do not have to pay any tax immediately.   So even if you have a very short period of service left, you can still contribute in NPS and effectively reduce your tax liability as the slab tax rate applicable to you after your retirement will be lower. Even if the slab rate is not going to change, you are still able to defer your tax liability to future.

I am sure this article will help clear the clouds of doubts in the mind of many readers.

So which income tax return form you need to file? Here is the answer.

So the new Income Tax forms have been notified by the government after the forms notified earlier in April were withdrawn due to huge protest by the tax payers. Let us now understand the latest requirements as to the forms which you are required to file. I also intend to discuss other relevant matters relating to additional disclosure on bank accounts and foreign travels as originally proposed and  modified as per these modified ITR forms.

The government has notified four forms for  filing of yourn income tax returns which are applicable to Individual and/or HUF. Let us discuss as to which form you need to file?

Form No ITR 1: This is also known as Sahaj meaning easy. This form can only be filed by an Individual and no other assessee can use this form for filing of their return of income. It is not that every individual can use this form. This form can only be used by a person whose source of income is salary and  not business.  Even a pensioners can use this form. Moreover you can also  use this form in case you have any income under the head income from other sources which generally includes interest from various investment products like saving bank account, recurring bank account, fixed deposits with bank and post offices.  This form can be used by you even if you have any exempt income in addition to the taxable income from two of the sources discussed above. You can not use this form in case your agricultural income exceeds Rs. 5,000/- in the previous year as the same need to be added to your regular income for the purpose of determining the average rate of tax on which your other income shall be taxed.  So you can use this form even if your other exempt income exceeds the threshold of Rs. 5,000/- earlier there was a cap of Rs. 5,000/- of exempt income for using this form.

Please note that if you have won any lottery or have any income from house race  in the last year, you can not use this form. Moreover you can use this form only if you own one house property, so in case you own more than one house, you can not use this form. This can also not be used in case you have any asset outside India or any income from a source outside India.

In my opinion this is the forms which would be applicable to majority of the tax payers as most of the tax payers are salaried and do not own more than one house property and have only income taxable under the head “Income from other sources” in addition to receiving either salaries or pension. 

Form No. ITR 2A : This is a new form introduced from this year.  This form can be used by Individual as well as an HUF unlike the form ITR 1 which can only be used by an Individual  and  who does not have any taxable income under the head “profits and Gains or business or Profession” or “capital Gains”. Moreover in case you have any foreign asset outside India or have income from any foreign source you still can not use this form for filing of your income tax return. It may be noted that you can use this form in case you have more than one house property or have agricultural income exceeding Rs. 5,000/- . This form is extended version of form No. ITR1 and can be used only if you either do not have business income or capital gains as well as do not own any foreign asset or have foreign income.

Form No ITR 2: This form can be used by Individual as well as an HUF.  This form can be used in case you have income taxable under the head Capital Gains in addition to the income taxable under the head “Salaries” and “Income from other Sources”. This form can be used by you even in case you have income from lotteries of horse races. This form can also be used by you in case you have agricultural income exceeding Rs. 5,000/- or you own more than one house property. However this  form  can not be used by you if you have any income taxable under the head “Profits and gains of business or profession howsoever small the amount taxable under this head.

This form can even be used by the resident tax payers who have any foreign asset or any income from foreign source.

Form No. ITR 4S: This is commonly called sugam. This form can be filed by any individual or an HUF who has   business income which is taxable at certain predefined basis either as certain percentage of your gross receipt/sales  or your income is presumed at fixed amount per income yielding asset owned by you like truck etc. So this form can be used only and only if your business income is taxable on  some presumptive basis. Broadly speaking this form can be filed  by a person who is otherwise entitled to file his return of income  in ITR 1 but can not file as he has certain business income taxable at predetermined way. So in case you have capital gains income or agricultural income exceeding Rs. 5,000 or own any foreign asset or have income from any foreign source you can not use this return to file your return of income. You can not use this form even if you have income from lottery or horse race.

Requirement of disclosure in respect of passport and bank accounts

The forms notified earlier had provisions for disclosure of foreign travels undertaken with details of expenses incurred by you. However the revised forms have done away with this requirement and you are only required to give details of your passport number.

As regards the other requirements of furnishing details of your bank account the earlier forms had requirement to furnish details of all the bank accounts held during the previous year  including the particulars of joint holders and closing balances in those bank account. The revised forms have the requirements to furnished the details of only active bank account and in case there are no transaction in the bank account during the last three year, you do not have to furnish the details of such dormant bank accounts. Moreover you are not required to furnish the details of balances at the year end and the details of the joint holder of the accounts.

However you are still required to furnish the  details of the bank name, IFSC code and account number of all your bank accounts whether saving or current account. It seems you are not required to furnish details of your recurring account or fixed deposits with banks held by you during the year.

The forms to be used by the person who has taxable income under the head profits and gains of business or profession  other than on presumptive basis are  not yet notified for the current filing.

I am sure the above discussion will help you in determining  which form you need to use for filing of your income tax return.