Budget 22-23: Tax Deduction Limit on Employers' Contribution to NPS Hiked to 14% for State Govt Employees

Moneylife Digital Team 01 February 2022

Economy & Nation

While presenting the Union Budget 2022, finance minister Nirmala Sitharaman proposed to increase tax deduction limit from 10% to 14% on employers’ contribution to the National Pension System (NPS) accounts of state government employees. The move will help enhance the social security benefits of state government employees and bring them on par with the Union government employees with respect to the employer’s contribution to NPS.

NPS is being administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA) set up under the PFRDA Act, 2013.

Investment in NPS offers tax benefit under three different Sections of the Income-Tax (I-T) Act, 1961. Investment of up to Rs1.5 lakh in NPS in a financial year is eligible for deduction under Section 80CCD (1). This deduction comes under the overall limit of Rs1.5 lakh allowed under Section 80C.

NPS offers additional deduction over and above the section 80C deduction. This additional deduction is available up to Rs50,000 under Section 80CCD (1b). A taxpayer can claim an additional deduction (from gross total income before levy of tax) up to Rs50,000 by investing in Tier-I accounts of NPS. This way a taxpayer can claim an overall tax benefit of Rs2 lakh in a particular financial year by investing in NPS. This tax benefit of Rs2 lakh is available only if an individual opts for the old tax regime.

Over and above the Rs2 lakh limit, any contribution from the employer is also eligible for deduction under Section 80CCD (2) of the Act. An employer’s contribution to employee’s NPS account becomes taxable if the employer’s contribution to NPS account, EPF and superannuation exceeds Rs7.5 lakh in a financial year. This employer’s contribution to the NPS account is the only tax break available under both the tax regimes, i.e. the new tax regime as well as the old one.

Currently, only Central government employees are eligible to claim tax benefit of 14% for the employer’s contribution to the NPS account of an employee. In case of private sector employees, the tax benefit is limited to 10%.

This means that from the next financial year (FY22-23), employees of the state governments will be able to claim a tax benefit of 14% on the NPS contribution made by their employer (the state government).

As per the Budget memorandum, "Under the existing provisions of the Act, any contribution by the Union government or any other employer to the account referred to in section 80CCD of the Act (NPS account), shall be allowed as a deduction to the assesses in the computation of his total income, if it does not exceed 14% of his salary where such contribution is made by the Union government. This limit is presently 10% of his salary where such contribution is made by any other employer. The state governments were given an option to raise the contribution to 14% from 1 April 2019 on their own volition, based on their own internal approvals and notifications, without seeking the approval of the PFRDA.”

“In order to ensure that the state government employees also get full deduction of the enhanced contribution by the state government, it is proposed to increase the limit of deduction under Section 80CCD of the Act from the existing 10% to 14% in respect of contribution made by the state government to the account of its employee.

“This amendment will take effect retrospectively from 1 April 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years; so as to ensure no additional tax liability arises on any contribution made in excess of 10% during such time."

Comments