Finance minister Nirmala Sitharaman on Tuesday, while presenting her budget speech, said NPS deduction for employer contributions for state govt employees raised from 10 per cent to 14 per cent, to bring them on par with central government employees.
Saraswathi Kasturirangan, Partner, Deloitte India, said: “Deduction for employer contribution to NPS increased from 10 per cent to 14 per cent for state govt employees on par with central govt employees. Not extended to non- govt employees”
The move is to bring parity between employees of states and central government and to enhance social security benefits.
Further, NPS offers additional deduction over and above the section 80C deduction. This additional deduction is available of up to Rs 50,000 under section 80CCD (1b). A taxpayer can claim an additional deduction (from gross total income before levy of tax) of up to Rs 50,000 by investing in Tier I accounts of NPS. This way a taxpayer can claim an overall tax benefit of Rs 2 lakh in a particular financial year by investing in NPS. This tax benefit of Rs 2 lakh is available only if an individual opts for old tax regime.
Over and above the Rs 2 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 will become taxable if the employer’s contribution to NPS account, EPF and superannuation exceeds Rs 7.5 lakh in a financial year. Remember, employer’s contribution to the NPS account is the only tax break available under both the tax regimes, i.e., new tax regime as well as old tax regime.
As per Budget Memorandum, “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 assesses in the computation of his total income, if it does not exceed 14 per cent of his salary where such contribution is made by the Central Government. This limit is presently 10 per cent 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 per cent w.e.f 01.04.2019 on their own volition, based on their own internal approvals and notifications, without seeking the approval of the Pension Fund Regulatory and Development Authority.
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 ten per cent to fourteen per cent in respect of contribution made by the State Government to the account of its employee.
This amendment will take effect retrospectively from April 1, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years.
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