Finance Minister Nirmala Sitharaman announced that state government employees will now be able to claim tax benefits of 14 per cent on the National Pension System (NPS) generated by their employer from the financial year 2022-23. “Under the existing provisions of the Act, any contribution by the Central 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 taxpayer in computing his total income, if it does not exceed 14 per cent of his salary where such contribution is made by the Central Government. The limit is presently 10 per cent of his salary where such contribution is made by any other employer. Pension Fund Regulatory and Development Authority to State Governments It was given an option to increase the contribution at will to 14 per cent, on the basis of its internal sanction and notifications, without the approval of the Government of India,” the budget memorandum mentioned.
At present, only central government employees are allowed to claim tax benefit of 14 per cent for employer’s contribution in their NPS accounts.
NPS Tax Benefits: State Government Employees Must Know
1) You can claim tax benefits on your contribution to the National Pension System and employer’s contribution 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 NPS fund under section 80CCD. (1). For private sector employees, 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 contribution to NPS under section 80CCD (1B). Only those investing in Tier 1 NPS accounts will be able to claim this additional deduction of Rs 50,000. There is no tax benefit available to those investing in Tier 2 NPS Fund.
Therefore, taxpayers can claim tax exemption of up to Rs 2 lakh in a financial year by investing in NPS. The mentioned tax deduction will be available if one chooses to pay income tax through the old income tax regime.
3) Now, salaried employees are also eligible to claim tax exemption for employer’s contribution towards NPS under section 80CCD(2) of the Income Tax Act. Now, both central government and state government employees will be able to claim tax benefit of 14 per cent on the NPS contributed by their employers. It is to be noted that the employer’s contribution to the employee’s NPS account will become taxable if the employer’s contribution to NPS account, EPF and retirement exceeds Rs 7.5 lakh in a financial year.
NPS New Tax Exemption Rule: When Will It Be Applicable?
This new rule will come into force with retrospective effect from April 1, 2020. Hence, state government employees can avail this tax exemption for the assessment year 2020-21 and subsequent years.
How will the state government employees benefit from this move?
“Employer’s contribution to NPS is eligible for deduction under section 80(CCD)(2), though limited to 10 per cent of salary as defined. For Central Government employees, it was available up to 14 per cent of salary, and This benefit has now been extended to state government employees as well. However, this benefit is not extended to non-government employees, where the 10 per cent limit applies,” said Saraswati Kasturirangan, partner, Deloitte India.
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