Budget gives New Pension System a boost

The Budget 2011-12 has made the New Pension System more attractive. It has made two rule changes which will help both individuals and their employers. The NPS is the pension system applicable to new government employees and is also open to all citizens, to save for their retirement, and is run as per the regulations of the Pension Fund Regulatory and Development Authority.

At present, the main tax deduction allowed to employees is an Rs 1 lakh umbrella exemption, under which all savings-related exemptions –such as insurance premium, employees provident fund (EPF) contributions- are clubbed.

While the employer’s contribution to EPF was not included, for calculating this limit, in the case of the NPS, it was being included. To illustrate: if Rs 10,000 is being deducted from the employee’s salary and credited into the account, and is matched by Rs 10,000 contribution from the employer, the total deduction was Rs 20,000.

This does not happen in the EPF scheme, where only the employee’s contribution of Rs 10,000 is included. That means the employee gets tax free income of Rs 10,000 (employers contribution) and can save another Rs 10,000 under some other tax-saving scheme.

This anomaly has been removed now, and the employer’s contribution has been taken out of the Rs 1 lakh-limit. This will benefit all government and non-government employees whose pension is operated under the NPS.

Employers too have got a higher incentive to contribute to the NPS. The Budget has introduced a proposal that will allow employers to claim their contribution to an employee’s NPS as a business expense, subject to a limit of 10% of salary (basic plus dearness allowances). This means if a company is being taxed at the marginal rate of 30%, and they contribute Rs 1,00,000 to an employee’s NPS, they will get a deduction of Rs 30,000. That is a significant sum.
In short, this will improve the attractiveness of the New Pension System to both subscribers and their employers.

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