Employer's Contribution to NPS in Taxable Salary

NPS is an excellent long-term savings investment, most preferred by salaried employees for its tax benefits and financial security after retirement. Both employers and employees contribute to NPS; employees' contributions are deducted from salary under section 80C,80CCD(1), and 80CCD(1B) under certain conditions. The employer contribution is included in the salary, and employees claim it as a deduction under section 80CCD(2) of the Income Tax Act.

This article will discuss employer contributions to NPS, their tax benefits, and taxability for employees. Additionally, we will explore the influence of employer contributions to NPS on how this affects return on investment and reduces employees' tax liability.

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

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

As per section 17 of the Income-tax Act, 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
• Perquisite (Car, Computer, Mobile, Accommodation, etc.)
• Contribution to employee’s pension account referred to in Section 80CCD

Therefore, any payment made by your employer to your NPS  account is a part of your taxable salary. However, for comparison, Employer contribution to PF will not be considered as a part of your Salary under section 17(1).

Portion of Employer’s Contribution to the NPS Account

Check your Form 16 (You can learn more about Form 16 here)

• Your Form 16 will look like this

•  Look for a break up of the 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 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.

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

• A resounding yes! If your employer contributes to your NPS account, you can claim 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 750,000 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:
  • 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.

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