Should I include employer’s contribution to NPS in my taxable salary?

It is true that many of us spend little time planning our retirement. We rely on EPF accumulations to come to our rescue. But for some of us, things have changed or soon will. Central government and a lot of private employers have moved to NPS. EPF is losing its glory in a falling interest rates scenario.

We we will discuss more about the pros/cons of investing in NPS. But for today we’ll focus on tax implications when your employer contributes to your NPS account.

Calculate monthly Pension & Tax Benefits through Cleartax NPS Calculator 

As a first step, let’s understand what ‘Salary’ is.

For a payment to be considered as salary, an employer-employee relationship must exist. In income tax act, taxable salary includes:

• Pension
• Taxable gratuity
• Commission, perks or profit in lieu of salary
• Advance salary
• Taxable leave encashment
• Taxable PF
• Contribution to employee’s pension account referred to in Section 80CCD

Therefore, any payment made by your employer to your pension account is a part of your taxable salary.

How to check if your taxable salary includes employer’s contribution to pension account?

Check your Form 16 (See our GUIDE to understand form 16 here)

Your Form 16 will look like this

• Look for a break up of total taxable salary

And a break up of your salary will show ‘Employer contribution to NPS or some such’. 

• Where your Form 16 taxable salary includes Employer’s NPS contribution, as is obvious, it is already included and do not need to add it anywhere.

Where you do not have a break up of taxable salary?

Usually this amount is included as part of your total taxable salary. DO NOT add it again, find out from your payroll team if the employer’s NPS contribution has been added to your taxable salary. You can also do a quick calculation if you have your payslips. By adding all the components on your payslip – such as basic, DA, allowances, etc, – you should be just short of the employer’s contribution amount to arrive at your total taxable salary number.

How to claim deduction on both my own (employee) and my employer’s contribution? 

• A resounding yes! If your employer is contributing to your NPS account you can claim deduction under section 80CCD(2). There is no monetary limit on how much you can claim, but it should not exceed 10% of your salary. 
• On contributions made by you, you can claim deduction under section 80C or 80CCD.  

Taxation of NPS

Section 80CCD(1) and Section 80CCD(2) provides tax deductions on NPS.

Section 80CCD (1)

This section provides a maximum deduction of 10% of employee’s salary (basic + DA) contributed in the previous year towards NPS. The maximum limit of deductions is capped at Rs 1.5 lakhs for a given financial year.

Section 80CCD (2)

• This section allows salaried individuals to claim the following deduction:
  A maximum deduction of 14% of their salary (basic + DA) contributed by the Central Government or State Government towards NPS.
• A maximum deduction of 10% of their salary (basic + DA) contributed by any other employer towards NPS.

Read here : How to Maximise Tax Benefits if you have an NPS account.

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