The National Pension Scheme (NPS), a defined contribution based pension system, is structured into two tiers:
Tier - I AccountThis NPS account does not allow premature withdrawal and is eligible for deduction under section 80CCD (1) of the Income Tax Act, 1961 to the extent of 10% of Basic Pay and Dearness Allowance (DA).
Tier - II AccountIn addition to the Tier - I account, employees can voluntarily contribute to the Tier - II account. The Tier - II account allows withdrawals at the option of the employee. However, contribution to this account does not attract any deduction under the Income Tax Act.
Such contributions towards NPS comprises of:
Employees' Deductions
Since employees' contribution (also called as deductions, as it is a deduction from the employee's salary) towards this scheme is structured into two tiers, two pay heads have to be created.
To create Employees' NPS Deduction Pay Head for Tier I account,
Go to Gateway of Tally > Payroll Info. > Pay Heads > Create
Enter the name of the Pay Head in the Name field
Select Employees' Statutory Deductions as the Pay Head Type from the List of Pay Head Types
Select National Pension Scheme (Tier - I) in the Statutory Pay Type field
Select Current Liabilities from the List of Groups in the Under field
By default, Affect Net Salary is set to Yes. Type No, if you do not want this component to be included in the Pay Slip
By default, the Pay Head component name entered in the Name field will appear in the Pay Slip, if you want to change the default Pay Head component name then type it in Name to appear in Payslip field
In the Calculation Type field, select the required type of calculation, User Defined Value, Flat Rate or As Computed Value. On selection of Calculation Type, the Calculation Period is pre-filled with Months by default
Select Normal Rounding from the list of Rounding Methods and type 1 as the rounding Limit
If the Calculation Type is set to As Computed Value, then
In the Compute field, select On Specified Formula from the Computation On list.
The Compute sub-screen appears.
In the Pay Head column, select Basic Pay from the List of Pay Heads and select Add Pay Head to add other pay heads that will be considered for NPS calculation and select End of List to return to Pay Head Creation
In the Effective Date field, enter the desired date from which the NPS deduction will come into effect
Select Percentage from the List of Slabs in the Slab Type field
Enter the required percentage for NPS in the Value Basis field
Note: The Calculation Type can be set to As Computed Value/Flat Rate/User Defined. If User Defined is selected as the Calculation Type, then while recording a Payroll Voucher, User Defined has to be selected in the Process For field of the Payroll Auto Fill sub-screen.
Press Enter to accept.
Create the Employees' NPS Deduction - Tier II pay head in the same way as Tier I Employee deduction is created but with the Statutory Pay Type as National Pension Scheme (Tier II).
The completed Pay Head Creation screen appears as shown:
Note: The Calculation Type can be set to As Computed Value/Flat Rate/User Defined. If User Defined is selected as the Calculation Type, then while recording a Payroll Voucher, User Defined has to be selected in the Process For field of the Payroll Auto Fill sub-screen.
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