Know about Employer's Contribution to NPS

Q: Is the employerâs contribution to NPS subject to tax?

Yes, the employerâs contribution to NPS is taxable under Section 17(1) of the Income Tax Act.

Q: Is the employerâs contribution to NPS included in the gross salary?

Yes, the employerâs contribution to NPS is included in the gross salary as per Section 17(1) of the Income Tax Act. However, you can claim a deduction under Section 80CCD(2), which offsets the impact.

Q: How can an employer report their NPS contributions in the Profit and Loss statement?

Employers can record their contributions to NPS as a âBusiness Expenseâ in the Profit and Loss statement.

Q: How can I check my employerâs contribution to my NPS account?

You can check your employerâs contribution to your NPS account using the NPS mobile app or by visiting the NSDL website.

Know About Employer's Contribution to NPS

The National Pension System (NPS) is a retirement savings scheme that offers a range of benefits to both employees and employers. While employees actively contribute to their NPS accounts, the role of the employer in this scheme is equally significant. We will dig deep into the details of employer contributions to NPS, including their impact on employees, tax benefits, and other important considerations.

What is NPS?

The National Pension System (NPS) is a government-backed retirement plan in India. It's designed to encourage individuals to save for their retirement and provide them with a regular income after they stop working. NPS is a defined contribution scheme, meaning the final pension amount depends on the contributions made and the investment returns generated. It offers a variety of investment options, tax benefits, and portability, making it a flexible and attractive retirement savings tool for many Indians.

What is the Employer's Contribution to NPS?

An employer can contribute a portion of an employee's salary towards their NPS account. This contribution is typically a percentage of the employee's Basic Salary plus Dearness Allowance (DA). While the contribution is optional for most employers, it is mandatory for government employees. The amount contributed by the employer is considered a business expense and is tax-deductible. This additional contribution significantly boosts the employee's retirement savings and helps them build a substantial corpus for their post-retirement life.

Tax Benefits of NPS

Tax Benefits for Employee Contributions

Section 80CCD(1): This section allows you to claim a tax deduction of up to 10% of your salary (Basic + DA) contributed towards NPS. However, this deduction is capped at a total of Rs. 1.5 lakhs under Section 80CCE, which includes deductions under Section 80C.
Section 80CCD(1B): In addition to the deduction under Section 80CCD(1), you can claim an additional deduction of up to Rs. 50,000 for contributions made to your NPS Tier I account. This is an over-and-above benefit to the Rs. 1.5 lakh limit under Section 80CCE.

Tax Benefits for Employer Contributions

Section 80CCD(2): Employers can claim a tax deduction for contributions made to their employees' NPS accounts. The deduction limit is 14% of the employee's salary (Basic + DA). However, there's a catch: the total employer contribution to PF, NPS, and Superannuation cannot exceed Rs. 7.5 lakhs. Any amount exceeding this limit is considered a perquisite and is taxable in the employee's hands.

Note: As per the new budget guidelines, the deduction on employees' basic salary has been increased from 10% to 14%. This change applies to both public-sector companies and private-sector entities under the new regime. Government employees already enjoy a 14% deduction on their NPS contributions under Section 80CCD(2) of the Income Tax Act, available in both the existing and simplified tax regimes. However, the higher 14% rate applies exclusively under the newly introduced simplified tax regime.

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How to Claim a Deduction on Employee and Employer’s Contributions?

For contributions made by you, the employee, you can claim a deduction under Section 80CCD(1) or 80CCD(1B):

Section 80CCD(1): Allows a deduction of up to 10% of your salary (Basic + DA) for contributions made to your NPS account. The maximum deduction under this section is capped at Rs. 1.5 lakhs.

Section 80CCD(1B): Offers an additional deduction of Rs. 50,000 over and above the Rs. 1.5 lakhs limit under section 80C. This means you can claim a total deduction of up to Rs. 2 lakhs for NPS contributions.

FAQs

Is the employer’s contribution to NPS subject to tax?

Yes, the employer’s contribution to NPS is taxable under Section 17(1) of the Income Tax Act.

Can I claim deductions under both Section 80CCD(1B) and 80CCD(2)?

Yes, you can. Section 80CCD(1B) pertains to employee contributions, while Section 80CCD(2) covers employer contributions. If contributions are made under both sections, deductions can be claimed accordingly.

What distinguishes Section 80CCD(1) from Section 80CCD(1B)?

Both sections refer to employee contributions to the NPS. Once the limit of ₹1.5 lakhs under Section 80CCD(1) is reached, an additional deduction of ₹50,000 can be claimed under Section 80CCD(1B).

Is the employer’s contribution to NPS included in the gross salary?

Yes, the employer’s contribution to NPS is included in the gross salary as per Section 17(1) of the Income Tax Act. However, you can claim a deduction under Section 80CCD(2), which offsets the impact.

What investment proof is needed for claiming tax benefits on NPS?

To claim tax benefits, you can submit your NPS transaction statement as proof. Alternatively, if you have a receipt for contributions made to your Tier 1 account during the financial year, that can also serve as proof.