Creating Employees' NPS Deduction Pay Head

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:

1. Employees' Deductions

2. Employer's Contribution

Employees' Deductions

Since employees' contribution towards this scheme is structured into two tiers, two pay heads have to be created.

• Employees' NPS Deduction - Tier I

• Employees' NPS Deduction - Tier II

Employees' NPS Deduction - Tier I

To create Employees' NPS Deduction Pay Head for Tier I account

1. Go to Gateway of Tally > Payroll Info. > Pay Heads > Create.
   
   

2. Enter the name of the Pay Head in the Name field.

3. Select Employees' Statutory Deductions as the Pay Head Type from the List of Pay Head Types.

4. Select National Pension Scheme (Tier - I) in the Statutory Pay Type field.

4. Select Current Liabilities from the List of Groups in the Under field.

5. By default, Affect Net Salary is set to Yes. Type No, to exclude this component from the pay slip.

6. By default, the pay head component name entered in the Name field appears in the pay slip. Enter the Name to appear in Payslip if you want to change the default pay head component name.

7. Select the required Calculation Type as User Defined Value, Flat Rate or As Computed Value.

8. Select Normal Rounding from the list of Rounding Methods, and type 1 as the rounding Limit.

9. If the Calculation Type is As Computed Value, in the Compute field, select On Specified Formula from the Computation On list. The Compute sub-screen appears.

• Select Basic Pay in the Pay Head column, from the List of Pay Heads.  

• Alternatively, select Add Pay Head from Additional Computations for table to add other pay heads.

•  Select End of List to return to Pay Head Creation.

10. In the Effective Date field, enter the desired date from when NPS will be effective.

11. Select Percentage from the List of Slabs, in the Slab Type field.

12. Enter the required percentage for NPS in the Value Basis field.
    
    

Note: You can set the Calculation Type to As Computed Value/Flat Rate/User Defined. If you select User Defined as the Calculation Type, you must select the same in the Process For field of the Payroll Auto Fill sub-screen while recording a payroll voucher.

13. Press Enter to accept.

Employees' NPS Deduction - Tier II

For Employees' NPS Deduction - Tier II pay head creation, set National Pension Scheme (Tier II) as the Statutory Pay Type. All other steps are the same as used for Employees' NPS Deduction - Tier I.

The completed Pay Head Creation screen appears as shown below:

Note: You can set the Calculation Type to As Computed Value/Flat Rate/User Defined. If you select User Defined as the Calculation Type, you must specify the same in the Process For field of the Payroll Auto Fill sub-screen while recording a Payroll Voucher..