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Friday, March 10, 2017

NPS in Budget 2017

There is something to cheer for NPS subscribers in the fine print of the budget speech 2017. The budget has given clarification on those partial withdrawal norms  (which came into effect from June 2015) and brought parity between  salaried individuals and the self-employed in terms of tax benefits.

The budget 2017 has clarified that NPS subscribers are allowed to make partial withdrawal of up to 25% from the contributed amount. This option is allowed for subscribers having contribution in account for at least 10 years. However, NPS subscribers can only withdraw for higher education or marriage of their children, construction or purchase of first house and treatment of specific ailments like cancer, kidney failure, paralysis etc.

PFRDA has stipulated a gap of minimum five years between withdrawals. Also the maximum number of withdrawals allowed is three. However, there is no such limit if withdrawal is made for illness.

Earlier, there was  confusion among NPS subscribers that partial withdrawal is allowed on accumulated corpus (market value) instead of contributed amount.

In its budget speech, the Finance Minister has said, "In order to provide further relief to the subscriber of NPS, it has been proposed to insert a new clause (12B) in the section 10 of Income Tax Act, 1961 to provide exemption on partial withdrawal not exceeding 25% of the contribution made by an employee in accordance with the terms and conditions specified under Pension Fund Regulatory and Development Authority Act, 2013 and regulations made there under."

Another key development for the NPS subscribers is the proposal to allow self-employed individuals to avail tax benefits of up to 20% of their annual income just like salaried individuals. So far, self-employed are allowed to avail tax deduction of up to 10% of their gross annual income subject to a maximum of Rs.1.50 lakh.

"In order  to  provide  parity  between  an  individual  who  is  an  employee  and  an individual who is self - employed, it is proposed to provide that the self-employed individual shall be eligible for deduction upto twenty per cent of  his gross total income in respect  of contribution made to National Pension System" says  the budget document.

However, salaried individuals still have an edge over self-employed subscribers, as the maximum deduction they can claim remained unchanged at Rs.1.50 lakh a year under Section 80 CCD(1) which also includes 80C instruments.

Also, self-employed can claim additional deduction of Rs.50,000 under Section 80CCD(1B) which was introduced in Budget 2015.

Overall, self-employed can claim a maximum deduction of Rs.2 lakh a year.

Currently, salaried individual enjoy an additional tax benefit from employer's contribution, which falls under Section 80CCD (2). Under this section, employer can contribute up to 10% of salary (basic plus DA). The best part is that there is no limit on such deductions. Self-employed cannot claim this tax benefit.

That means, if a person is getting salary of Rs.20 lakh then he can claim deduction of up to Rs.4 lakh a year (1.50 lakh under section 80CCD(1), Rs.50000 under section 80CCD (1B) and Rs.2lakh under section 80CCD (2)). However, self-employed can only claim up to Rs.2 lakh a year.

Both these benefits will be effective from 1st April 2017.

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