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 have before and 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.We’ve been asked these questions a lot and we’ll address them today –

  • Do I need to include my employer’s contribution in my total taxable salary?
  • Can I claim deduction on both my own and my employer’s contribution?

 

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

For a payment to be considered as salary, an employer-employee relationship must exist.

The 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.

Now the question is how do you check if your taxable salary includes this amount

  • Check your Form 16 (See our GUIDE to understand form 16 – here)
  • Look for a break up of total taxable salary

You Form 16 will look like this –

image_for_nps_80ccd2_article

 

 

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

nps_image

  • 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 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 pay slip – such as Basic, DA, allowances etc, – you should be just short of employer’s contribution amount to arrive at your total taxable salary number.

Now the second part

Can I claim deduction on both my own and my employer’s contribution?

A resounding yes! If you 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(1B).

To find out more about how to make the most of your contribution by maximising both these sections. And possibly taking your total deductions to Rs 2lakhs – READ here How to Maximise Tax Benefits if you have an NPS account.

 

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