Employer's Contribution to NPS in Taxable Salary

Employer's contribution to NPS can be claimed as a deduction under section 80CCD(2) of the Income Tax Act, 1961. Unlike others, deduction under section 80CCD(2) can be claimed under both the old and new regimes.

What is NPS?

NPS stands for National Pension System. It is a retirement savings scheme that allows both salaried employees and self employed taxpayers to participate, making both kind of taxpayers eligible for tax deductions. Unlike other savings scheme, investments in NPS gives market returns, making it more attractive for investors with risk appetite.

What is Employer's contribution to NPS?

• For salaried employees, both the employees and the employers are supposed to contribute a specified amount to the pension scheme.
• While there is no maximum ceiling limit under the scheme, contributions up to 14% of basic pay can be allowed as deduction against total income, irrespective of the regime chosen.

Calculate Monthly Pension & Tax Benefits through the ClearTax NPS Calculator.

How to Check Employer’s Contribution to NPS Account?

• Employer's contribution towards NPS will be reflected in the employee's Form 16.
• Also, employer's contribution towards NPS component will also be reflected in the employee's payslip.
• Where your Form 16 taxable salary includes the Employer’s NPS contribution, as is obvious, it is already included and does not need to be added anywhere.

Where Do You Not Have A Breakdown 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.

Can I Claim a Deduction on both Employee and Employer’s Contributions? 

• Yes, employer contributes towards NPS account can be claimed as a deduction under Section 80CCD(2). 
• There is no monetary limit on how much you can claim, but it should not exceed 10% of your basic salary under the old regime and 14% of your basic salary under the new regime.  
• However, there is a threshold limit of Rs 7,50,000 on the overall contribution done by the employer towards NPS, PF and superannuation combined. Any excess amount will be taxable.
• For the contributions made by you, i.e employee contribution, you can claim a deduction under section 80CCD(1) or 80CCD(1B). Section 80CCD(1B) provides additional deduction of Rs 50,000 over and above Rs 1.5 lakhs provided in 80C.  

Taxation of NPS

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

Section 80CCD (1)

This section provides a maximum deduction of 10% of the 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.

Note: This deduction is only available under the old regime.

Section 80CCD (1B)

This section provides a maximum deduction of Rs 50,000. This limit is over and above the limit of Rs 1,50,000 provided in section 80C. It is important to point out that both 80CCD(1) and 80CCD(1B) are employee contributions to NPS. If an employee has exhausted the limit of Rs 1.5 lakhs [80C+80CCD(1)], then such taxpayer can utilise the additional limit of Rs 50,000 under 80CCD(1B).

Note: This deduction is only available under the old regime.

Section 80CCD (2)

• This section allows salaried individuals to claim the following deduction against employer's contribution towards NPS:
  • A maximum deduction of 14% of their salary (basic + DA) contributed by the Central Government or State Government towards NPS.
  • Old Tax Regime: A maximum deduction of 10% of their salary (basic + DA) contributed by any other employer towards NPS.
  • New tax Regime: A maximum deduction of 14% of their salary (basic + DA) contributed by any other employer towards NPS.
• There is a maximum limit of Rs 7,50,000 on employer contribution to PF, NPS and Superannuation. Thus any contribution by the employer over and above the limit of such excess amount will be considered as perquisite and taxable under section 17(2) of Income-tax Act.

Note: This deduction is available under both the regimes.