Triple tax advantage on the NPS; Know how it works, who can claim

Finance Minister Nirmala Sitharaman has announced that state government employees will now be able to claim a 14% National Pension System (NPS) tax benefit granted by their employer from the financial year 2022-23 . “Under the current provisions of the law, any contribution by the state or any other employer to the account referred to in Section 80CCD of the law (NPS account) is allowed as a deduction from the contributions in calculating its total income. , if this does not exceed 14 per cent of his salary when this contribution is paid by the State. This limit is currently 10 per cent of his salary when such a contribution is paid by any other employer. States had the option to increase the contribution to 14% from 01.04.2019 on their own accord, based on their own internal approvals and notifications, without seeking approval from the Regulatory and Development Authority pension funds”, the budget memorandum mentioned.

Currently, only central government employees are allowed to claim a 14 percent tax benefit for the employer’s contribution to their NPS accounts.

NPS Tax Benefits: State Government Employees Need to Know

1) You can claim tax benefits on your contribution and employer’s contribution to the National Pensions Scheme under various sections of the Income Tax Act 1961. State government employees can claim tax exemption of up to Rs 1.5 lakh for contribution to the NPS fund under section 80CCD. (1). For employees in the private sector, the tax benefit is limited to 10 per cent.

2) In addition, employees can also claim an additional deduction of up to Rs 50,000 for contributing to NPS under Section 80CCD(1b). Only those who invest in NPS Tier 1 accounts will be able to claim this additional deduction of Rs 50,000. No tax benefit is available for those who invest in NPS Tier 2 funds.

Thus, taxpayers can claim tax exemption of up to Rs 2 lakh in a financial year by investing in NPS. The mentioned tax deductions will be available if one chooses to pay income tax via the old income tax system.

3) Now, salaried employees can also claim tax exemption for employer contributions to NPS under Section 80CCD(2) of the Income Tax Act. From now on, employees of the central government and state administrations will be able to benefit from a tax advantage of 14% on the NPS paid by their employers. It should be noted that the employer’s contribution to the employee’s NPS account will become taxable if the employer’s contribution to the NPS account, EPF and superannuation exceeds Rs 7.5 lakh during ‘an exercise.

New NPS tax exemption rule: when will it be applicable?

This new rule will come into effect retrospectively from April 1, 2020. Thus, state employees can benefit from this tax exemption for the 2020-21 tax year and subsequent years.

How will this move benefit state government employees?

“Employer contributions to the NPS are eligible for a u/s 80 (CCD)(2) deduction, but limited to 10% of salary as defined. For central government employees, this was available up to 14 percent of salary, and this benefit has now been extended to state government employees as well. However, this benefit has not been extended to non-government employees where the 10% limit continues to apply,” said Saraswathi Kasturirangan, Partner, Deloitte India.

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