Finance Minister Nirmala Sitharaman announced that state government employees can now claim a 14 percent tax break on the National Pension System (NPS) from fiscal year 2022-23. “Under the existing provisions of the Act, any contribution from the central government or other employer to the account referred to in Section 80CCD of the Act (NPS Account), is allowed as a tax deduction in the calculation of its total income, if this does not exceed 14 percent of his salary, if this contribution is paid by the central government. This limit is currently 10 percent of his salary when such a contribution is paid by another employer. The state governments were given an option to increase the contribution to 14 percent by 01.04.2019 of their own accord, based on their own internal approvals and notifications, without the approval of the Pension Fund Regulatory and Development Authority,” the budget note said.
At the moment, only civil servants can claim a tax advantage of 14 percent for the employer’s contribution to their NPS account.
NPS Tax Benefits: State Government Employees Need To Know
1) You can claim tax breaks on your contribution and employer’s contribution to the National Pension System under different sections of the Income Tax Act, 1961. Employees of the State Government can claim a tax exemption of up to Rs 1.5 lakh for the contribution to the NPS fund under Section 80CCD (1). For employees in the private sector, the tax benefit is limited to 10 percent.
2) Furthermore, 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 Tier 1 NPS accounts can claim this additional deduction of Rs 50,000. There are no tax benefits available to those who invest in Tier 2 NPS funds.
Thus, taxpayers can claim a tax exemption of up to Rs 2 lakh in a fiscal year by investing in NPS. The aforementioned tax deductions are available if one chooses to pay income tax through the old income tax regime.
3) Employed employees are now also eligible for tax exemption for employer contributions to NPS under Section 80CCD(2) of the Income Tax Act. Now, both the government and government employees can claim a 14 percent tax benefit on the NPS contributed by their employers. It should be noted that the employer contribution is the NPS account of the employee, becomes taxable if the employer contribution to the NPS account, EPF and pension exceeds Rs 7.5 lakh in a financial year.
NPS New Tax Exemption Rule: When Does It Apply?
This new rule will take effect retroactively from April 1, 2020. Employees of the central government can therefore benefit from this tax exemption for assessment year 2020-21 and the years thereafter.
How will this move benefit state government workers?
“Employer contributions to NPS are eligible for a deduction of 80 (CCD)(2), but limited to 10 percent of salary as defined. For government officials this was available up to 14 percent of the salary, and this benefit has now also been extended to government officials. However, this benefit has not been extended to non-governmental workers where the 10 percent limit still applies,” said Saraswathi Kasturirangan, Partner, Deloitte India.
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