Deduction in respect of employer contribution to pension scheme of Central Government.
124(1)
Where in the case of an assessee, being an individual employed by any employer, if an employer makes any contribution in his account under a pension scheme notified by the Central Government, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by such employer as does not exceed—
- (a) 14%, where such contribution is made by the employer being the Central Government or the State Government; and
- (b) 10%, where such contribution is made by an employer other than an employer referred to in clause (a), of his salary in the tax year.
124(2)
Where the total income of the assessee is chargeable to tax under section 202(1), the provisions of sub-section (1) shall have effect as if for “10%” referred to in clause (b) of that sub-section, “14%” had been substituted.
124(3)
An assessee referred to in sub-section (1), or any other assessee, being an individual, shall be allowed a deduction in computation of his total income of the whole of the amount paid or deposited in the tax year in his account under a pension scheme notified or as notified by the Central Government, which shall not exceed fifty thousand rupees.
124(4)
The deduction under sub-section (3) shall also be allowed where any payment or deposit is made to the account of a minor under the said pension scheme, by the assessee, being the guardian of such minor, subject to the condition that the aggregate amount of deduction under sub-section (3) and this sub-section shall not exceed fifty thousand rupees.
124(5)
No deduction under sub-section (3) shall be allowed in respect of the amount on which a deduction has been claimed and allowed under section 123.
124(6)
Any amount standing to the credit of the assessee or a minor, in his account or the account of a minor, as the case may be, referred to in sub-sections (1), (3) and (4), in respect of which a deduction has been allowed together with the amount accrued thereon, received by the assessee or his nominee, in whole or in part, in any tax year,—
- (a) on account of closure or his opting out of the pension scheme referred to in sub-sections (1) and (3); or
- (b) as pension received from the annuity plan purchased or taken on such closure or opting out, the whole of the amount referred to in clause (a) or (b) shall be deemed to be the income of the individual or his nominee, in the tax year in which such amount is received, and shall accordingly be charged to tax as income of that tax year.
124(7)
The amount received by the nominee, on the death of the assessee, under the circumstances referred to in sub-section (6)(a), shall not be deemed to be the income of the nominee.
124(8)
The amount received by a person, being the guardian or nominee of a minor on account of closure of the pension scheme due to the death of the minor referred to in sub-section (4), shall not be deemed to be the income of such person.
124(9)
For the purposes of this section, the assessee shall not be deemed to have received any amount in the tax year, if such amount is used for purchasing an annuity plan in the same tax year.
124(10)
Where any amount paid or deposited by the assessee has been allowed as a deduction under sub-section (3), no deduction with reference to such amount shall be allowed as deduction under section 123 for that tax year.
124(11)
For the purposes of this section, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
Section Summary:
This section provides tax deductions for contributions made by employers and individuals to pension schemes notified by the Central Government. It outlines the limits for deductions based on the type of employer (government or non-government) and allows additional deductions for individual contributions. It also specifies tax treatment for withdrawals, closures, or payouts from such pension schemes.
Key Changes:
Employer Contributions:
- Government employers (Central or State) can contribute up to 14% of the employee's salary, while other employers can contribute up to 10% of the salary.
- If the employee's income is taxed under Section 202(1), the limit for non-government employers increases to 14% (matching government employers).
Individual Contributions:
- Individuals can claim a deduction of up to ₹50,000 for their own contributions to a notified pension scheme.
- Contributions made to a minor's pension account by a guardian are also eligible for deduction, but the combined limit for self and minor contributions remains ₹50,000.
Taxation of Withdrawals:
- Amounts received on closure, opting out, or as pension from annuity plans are taxable as income in the year of receipt.
- Exceptions apply for amounts received by nominees or guardians in case of death.
Interaction with Other Sections:
- Deductions under this section cannot be claimed if a deduction has already been claimed under Section 123 for the same amount.
Practical Implications:
For Employees:
- Employees of government and non-government organizations can benefit from tax deductions on employer contributions to pension schemes.
- Individuals can further reduce their taxable income by contributing up to ₹50,000 to their pension accounts.
For Employers:
- Employers must ensure contributions comply with the specified limits (14% for government, 10% for others) to enable employees to claim deductions.
For Guardians:
- Guardians contributing to a minor's pension account can claim deductions, but the total deduction (self + minor) cannot exceed ₹50,000.
Taxation of Withdrawals:
- Taxpayers must be aware that withdrawals or pension payouts are taxable, except in cases of death where the amount is received by a nominee or guardian.
Critical Concepts:
Salary Definition:
- Salary includes dearness allowance (if part of employment terms) but excludes other allowances and perquisites.
Annuity Plan:
- If withdrawals are used to purchase an annuity plan in the same tax year, the amount is not considered taxable income.
Interaction with Section 123:
- Deductions under this section and Section 123 are mutually exclusive for the same contribution amount.
Compliance Steps:
For Employees:
- Ensure employer contributions are within the specified limits (14% for government, 10% for others).
- Maintain records of individual contributions to claim deductions up to ₹50,000.
For Employers:
- Verify contribution percentages and ensure compliance with the law.
- Provide employees with necessary documentation for tax filing.
For Guardians:
- Keep records of contributions made to a minor's pension account.
- Ensure the combined deduction (self + minor) does not exceed ₹50,000.
Reporting Withdrawals:
- Report any withdrawals, closures, or pension payouts as taxable income in the year of receipt, unless exempted (e.g., death-related payouts).
Examples:
Employer Contribution:
- An employee earns a salary of ₹10,00,000. Their employer (a private company) contributes ₹1,00,000 (10%) to their pension account. The employee can claim a deduction of ₹1,00,000 under this section.
Individual Contribution:
- An individual contributes ₹40,000 to their pension account and ₹20,000 to their minor child's pension account. They can claim a total deduction of ₹50,000 (₹40,000 + ₹10,000, as the combined limit is ₹50,000).
Withdrawal Taxation:
- An individual closes their pension account and receives ₹5,00,000. This amount is taxable as income in the year of receipt. However, if they use ₹5,00,000 to purchase an annuity plan in the same year, it is not taxable.
Death-Related Payout:
- If an employee dies, and their nominee receives ₹10,00,000 from the pension scheme, this amount is not taxable as income for the nominee.