In a bid to boost NPS, Finance Minister Arun Jaitley on Wednesday proposed higher tax rebate for investment in flagship social security programmes and allowed tax relief on partial withdrawal of up to 25 per cent of the contribution.
Under the Income Tax Act, employee or other individuals are allowed deduction for amount deposited in the National Pension System Trust (NPS). The deduction cannot exceed 10 per cent of salary in case of an employee or 10 per cent of gross total income in case of other individuals.
However, further deduction to an employee in respect of contribution made by his employer is allowed up to 10 per cent of the employee’s salary.
Effectively, it means that in the case of an employee, the deduction allowed under section 80CCD adds up to 20 per cent of salary whereas in case of other individuals, the total deduction is limited to 10 per cent of gross total income.
“In order to provide parity between an individual who is an employee and an individual who is self-employed, it is proposed to amend section 80CCD so as to increase the upper limit of 10 per cent of gross total income to 20 per cent in case of individual other than employee,” Jaitley said while unveiling his tax proposals in Parliament.
In order to provide further relief to an employee subscriber of NPS, it is proposed to amend the Act so as to provide “exemption to partial withdrawal not exceeding 25 per cent of the contribution made by an employee”.
The existing provision provides that payment from NPS trust to an employee on closure of his account or opting out is exempted up to 40 per cent of total amount payable to him.
The amendments will take effect from April 2018 and will accordingly apply in relation to the assessment year 2018-19 and subsequent assessment years.