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Income tax rules on employer’s contribution to NPS: How it is calculated


How is employer’s contribution to NPS treated in income tax calculation of salaried employee? Is it deductible within the overall limit of Rs. 1.50 lakhs under Section 80C? 

The employee’s own contribution toward his NPS account is eligible for deduction under Section 80CCD (1) and not under Section 80C. The limit of Rs. 1.50 lakh is prescribed under Section 80CCE which cover all the items eligible for deduction under Section 80C, 80CCC and 80 CCD (1).

In respect of employer’s contribution toward NPS account of an employee, deduction under Section 80CCD (2) is available to an employee. This is over and above the deduction of Rs. 1.50 available under Section 80 C, 80CCC and 80 CCD(1) taken together. The deduction under Section 80CCD (2) is available upto 10% of the basic salary and dearness allowance of the employee. For the Central and State government employee a higher deduction of 14% of contribution as percentage of basic salary is available. Though there is no overall limit for deduction in respect of employer’s contribution towards NPS account of an employee under Section 80CCD (2) but Section 17(2) of the Income Tax Act provides that in case aggregate of employer’s contribution towards employee’s employee provident fund, National Pension System and Superannuation exceeds seven lakhs fifty thousand in a year, the excess shall be taxed as perquisite in the hands of the employee. So effectively an employee can claim deduction upto Rs. 7.50 lakhs for employer’s contribution to his NPS account in a year.  

Over and above deduction up to 1.50 lakh toward own NPS account, all taxpayer are eligible for an additional exclusive deduction of up to 50,000 under Section 80CCD (1B). So, overall on can contribute up to 2 lakh to your NPS account and get benefits of tax deduction. 

So in case your own contribution deducted by the employer from your salary along with other eligible items under Section 80C and 80CCC exceeds the threshold of one lakh fifty thousand rupees, you can claim deduction in respect of excess amount upto your own contribution to your NPS account under Section 80 CCD(1B) without having to make any extra contribution to your NPS account.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.

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