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

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..... egislative 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 res .....

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..... 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 Sub-section (9): Annuity Plan Purchases Clause 124(9) clarifies that if the withdrawn amount is used to purchase an annuity plan in the same tax year, it is not considered received, thus deferring tax liability and encouraging continued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 .....

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..... s. 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, .....

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