Budget 2022 hikes tax exemption on employer’s NPS contribution for state govt staff to 14% from 10%
Employees of the state governments will be able to claim a tax benefit of 14% on the NPS contribution made by their employer, i.e., state government from FY 2022-23 onwards. Currently, only central government employees are eligible to claim tax benefit of 14% for the employer’s contribution to the NPS account of an employee. In case of private sector employees, the tax benefit is limited to 10%.
Investment in the National Pension System (NPS) is offers tax benefit under three different sections of the Income-tax Act, 1961.
Investment up to Rs 1.5 lakh in NPS in a financial year is eligible for deduction under section 80CCD (1). This deduction comes under the overall limit of Rs 1.5 lakh allowed under section 80C.
Further, NPS offers additional deduction over and above the section 80C deduction. This additional deduction is available of up to Rs 50,000 under section 80CCD (1b). A taxpayer can claim an additional deduction (from gross total income before levy of tax) of up to Rs 50,000 by investing in Tier I accounts of NPS. This way a taxpayer can claim an overall tax benefit of Rs 2 lakh in a particular financial year by investing in NPS. This tax benefit of Rs 2 lakh is available only if an individual opts for old tax regime.
Over and above the Rs 2 lakh limit, any contribution from the employer is also eligible for deduction under section 80CCD (2) of the Act. An employer’s contribution to employee’s NPS account will become taxable if the employer’s contribution to NPS account, EPF and superannuation exceeds Rs 7.5 lakh in a financial year. Remember, employer’s contribution to the NPS account is the only tax break available under both the tax regimes, i.e. new tax regime as well as old tax regime.
