NPS is an excellent long-term savings investment option that offers tax benefits and financial security after retirement. Anyone can contribute to NPS and claim deductions under Sections 80C, 80CCD(1), and 80CCD(1B). The employer contribution towards employees NPS can be claimed as a deduction under section 80CCD(2) of the Income Tax Act by the employee.
This article will discuss the tax benefits of NPS, the influence of employer contributions to NPS, and its effects on the ITR.
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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:
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).
Employer's contribution towards NPS will be reflected in the employee's Form 16.
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.
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.
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.
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)
Note: This deduction is available under both the regimes.
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