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New Pension System (NPS) - Employee / Employer Contribution - Income Tax Implication amp; Tax Calculation

Introduction

The New Pension System consists of two types of accounts :

Tier-I account: Employer / Employee can contribute for retirement into this non-withdrawal account. Income Tax benefits as per the Income Tax Act, 1961 are available for both employer and employee contributions.

Tier-II account: This is a voluntary savings facility, where the subscriber can avail Fund Management facility at very low costs. Subscriber will be free to withdraw savings from this account whenever they wish. NPS Investment Benefits / Scheme Features / withdrawal etc.

The Contribution to Tier-I is mandatory for all Government servants joining Government service on or after 1-1-2004 whereas Tier-II will be optional and at the discretion of Government servants.

The benefit of new pension scheme has been extended to any other employees (also self-employed person) with retrospective effect from 1-4- 2009 (A.Y. 2009-10).

Further, the all the employees (officer /workmen) joining the services of Banks on or after 01.04.2010 are also covered under Defined Contributory Pension Scheme.

New Pension Scheme - Deductions and Taxability

  1. Employee's Contribution

    Deduction is available under section 80CCD(1) in respect of employee's contribution in the year in which contribution is made. However no deduction is available in respect of Employee's contribution, which is in excess of 10% of the salary (Salary for the purpose of section 80 CCD includes dearness allowance if the terms of employment so provide, but excludes all other allowances and perquisite) of the Employee.

  2. Employer's contribution

    Employer's contribution (Central Government or any other Employer) to NPS is taxable as salary income in the year of contribution. However, Deduction available is under section 80CCD(2) in respect of employer's contribution - Contribution by employer to NPS is deductible in hands of the concerned employee in the year in which contribution is made. However, no deduction is available in respect of employer's contribution which is in excess of 10% of the salary of the employee.

Income tax concession to Employees under NPS

The contribution made by a New Pension Scheme subscriber in Tier I scheme is deductible from the total income under Section 80CCD of the Income Tax Act. The aggregate amount of deduction under sections 80C, 80CCC and 80CCD cannot exceed Rs. 1,50,000 (section 80CCE)

It is clarified that if the NPS subscriber is already having other eligible deductions such as LIC premium, PPF, bank or NSC deposits, ELSS etc., under Section 80C, 80CCC and Section 80CCD., deduction allowed under Section 80CCD in respect of contribution towards New Pension Scheme may not be of much useful as the overall limit of savings eligible for deduction is pegged at Rs. 1.50

Further, contribution made by the employer in Tier I New pension scheme should also be included in the Total income of NPS subscriber as far as calculation of income tax is concerned, while full deduction of the same from income under Section 80CCD may not be possible as other savings made by the subscriber covers the overall limit of Rs.1.50 lakh under Section 80CCD. Hence, for a NPS subscriber contribution for NPS by the Government may be taxable in some of the cases.

Income tax concession to Employers under NPS

With effect from 1st April, 2012 i.e. applicable to the assessment year 2012-13 (for the income earned in the financial year 2011-12) and subsequent years the section 36 was amended as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme including New Pension Scheme (NPS) to the extent it does not exceed ten per cent of the salary of the employee, shall be allowed as deduction in computing the income under the head "Profits and gains of business or profession".

Steps of Computation of Taxable Income (Salary) of a Employee Covered under NPS

1. Income from Salary
2.Add : Employer's contribution to NPS
3.Gross Total taxable salary Income ( 1+2 )
4. Less : Deduction u/s 80C (LIC/PPF/ELSS etc)
5. Employee's Contribution NPS 80CCD(1)
6. Total ( 4+5 )(but maximum 1.50 lakh)
7. Less :Employer's contribution to NPS
Deduction u/s 80CCD(2)
8.Total deduction ( 6+7 )
9. Net Taxable Salary Income ( 3 -7 )

Tax Treatment on withdrawal from NPS

  • Withdrawal on retirement/at the age of 60

    Withdrawal up to 40% of the accumulated wealth in NPS is exempt from tax at the time of retirement. However maximum amount that you can withdraw at the retirement is 60% of the accumulated wealth and balance 40% needs to be utilized for the purchase of annuity providing monthly pension to the subscriber.

  • Withdrawal from NPS before retirement (irrespective of the cause)

    If you want to exit from NPS before the age of 60 or before retirement the amount withdrawn will not be taxable but the amount that can be withdrawn is limited to only 20% of the accumulated wealth in NPS and balance 80% of the accumulated pension wealth has to be utilized for purchase of annuity providing for monthly pension of the subscriber. However the annuity income shall be taxable in the year of receipt as per the income tax slab rate applicable to the subscriber.