Tax Incentives for Pension Contributions under NPS : Clause 124 of the Income Tax Bill, 2025 Vs. Section 80CCD of the Income Tax Act, 1961

Clause 124 Deduction in respect of employer contribution to pension scheme of Central Government.

Income Tax Bill, 2025

Introduction

Clause 124 of the Income Tax Bill, 2025, and Section 80CCD of the Income Tax Act, 1961, both deal with deductions related to contributions to pension schemes notified by the Central Government. These provisions are pivotal in promoting retirement savings among individuals by offering tax incentives. The legislative intent behind these provisions is to encourage both employers and employees to contribute towards pension schemes, thus ensuring financial security post-retirement. This commentary provides a comprehensive analysis of Clause 124, compares it with the existing Section 80CCD, and explores their implications and potential areas for reform.

Objective and Purpose

The primary objective of both Clause 124 and Section 80CCD is to incentivize contributions to pension schemes by providing tax deductions. These deductions serve as a financial incentive for individuals to invest in their retirement savings, thereby reducing the burden on state-sponsored pension schemes. The provisions reflect a policy shift towards encouraging personal responsibility for retirement savings, aligning with global trends in pension reforms.

Detailed Analysis of Clause 124

Employer Contributions

Clause 124(1) allows deductions for employer contributions to an individual's pension scheme, with a cap of 14% for Central or State Government employers and 10% for other employers.

Clause 124(2) modifies this cap to 14% for non-government employers if the individual's income is chargeable u/s 202(1). This provision aligns the deduction limits with those applicable to government employees, promoting parity in retirement savings incentives.

Sub-section (3) and (4): Individual Contributions

Clause 124(1) allows a deduction for individual contributions up to fifty thousand rupees, applicable to both the individual's account and a minor's account under the pension scheme.

Clause 124(4) ensures that the aggregate deduction for contributions to a minor's account does not exceed the fifty thousand rupees limit, emphasizing the importance of investing in minors' future financial security.

Avoidance of Double Deduction

Clause 124(5) prevents double deductions by disallowing deductions on amounts already claimed u/s 123. Similarly, Sub-section (10) ensures that amounts claimed under sub-section (3) are not deducted again u/s 123, maintaining the integrity of the tax deduction system.

Sub-section (6), (7), and (8): Tax Implications on Withdrawal

Clause 124(6) specifies that amounts withdrawn from the pension scheme, whether due to closure or opting out, are taxable in the year of receipt.

However, Clause 124(7) and (8) provide exceptions for amounts received by nominees or guardians upon the death of the assessee or minor, ensuring that such amounts are not considered taxable income, thereby offering financial relief in unfortunate circumstances.

Sub-section (9): Annuity Plan Purchases

Clause 124(9) clarifies that if the withdrawn amount is used to purchase an annuity plan in the same tax year, it is not considered received, thus deferring tax liability and encouraging continued investment in retirement security.

Definition of Salary

The definition of "salary" in sub-section (11) includes dearness allowance but excludes other allowances and perquisites, ensuring clarity in calculating the deduction limits.

Comparison with Section 80CCD

Employer Contributions

Both Clause 124 and Section 80CCD allow deductions for employer contributions with similar percentage caps. However, Clause 124 introduces a provision in sub-section (2) that enhances the deduction cap for non-government employers under specific tax conditions, a feature absent in Section 80CCD.

Individual Contributions

Section 80CCD(1B) similarly allows deductions for individual contributions up to fifty thousand rupees, mirroring Clause 124(3). Both provisions also allow for contributions to minors' accounts, but Clause 124 explicitly addresses the aggregate deduction limit for minors, providing clearer guidelines.

Tax Implications on Withdrawal

Both provisions tax amounts withdrawn from the pension scheme, but Clause 124 provides additional clarity on exceptions for nominees and guardians, particularly in cases involving minors, which is a refinement over Section 80CCD.

Avoidance of Double Deduction

Section 80CCD(4) also prevents double deductions, similar to Clause 124(5) and (10), ensuring consistency in tax treatment across provisions.

Annuity Plan Purchases

Both provisions encourage reinvestment in annuity plans by deferring tax recognition, indicating a consistent policy approach to promoting long-term retirement savings.

Practical Implications

These provisions significantly impact employers, employees, and tax professionals.

Employers need to adjust payroll systems to account for the enhanced deduction limits, especially for non-government employers.

Employees benefit from increased savings and tax efficiency, while tax professionals must navigate the nuances of these provisions to optimize tax planning for clients.

Comparative Analysis with Other Jurisdictions

Globally, many jurisdictions offer tax incentives for retirement savings, but the structure and limits vary. The enhanced deduction limits and specific provisions for minors in Clause 124 reflect a progressive approach, aligning with best practices seen in countries with advanced pension systems.

Conclusion

Clause 124 of the Income Tax Bill, 2025, and Section 80CCD of the Income Tax Act, 1961, both play crucial roles in promoting retirement savings through tax incentives. While similar in many respects, Clause 124 introduces refinements and clarifications that enhance its effectiveness and fairness. Future reforms could focus on increasing deduction limits and expanding eligibility to further bolster retirement savings.

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Full Text:

Clause 124 Deduction in respect of employer contribution to pension scheme of Central Government.

 

Dated: 15-4-2025