As per the Union Budget 2022, employees of state governments will enjoy tax benefit of 14% on the National Pension Scheme (NPS) contribution made by their employers. Till now, only Central government employees were able to claim tax benefit of 14 per cent for their employer’s contribution to their NPS account, whereas private sector employees were able to claim tax 10 per cent tax benefit.
Starting April 2022, both central and state government employees will be treated equally, for which it has been proposed that the tax deduction limit be increased from 10 per cent to 14, on the contribution made by state government employers to the NPS account of their employees. The objective is to make the state government staff feel more socially secure.
Private-sector or non-government employees will see no changes in deduction benefits. The limit will remain 10 per cent.
By increasing the NPS contribution, the Government is ensuring that the state government staff are able to look forward to a larger fund at their disposal when they retire.
By investing in the National Pension System (NPS) tax benefit can be enjoyed under three different sections of the Income Tax Act, 1961.
Deduction under section 80CCD (1) can be claimed for investment of up to Rs 1.5 lakh in NPS in a single financial year. This is covered under the overall limit of Rs 1.5 lakh as per section 80C. Additionally, NPS also offers deduction of up to Rs 50,000 under section 80CCD (1b), by investing in tier I accounts of NPS. This allows one to claim an overall tax benefit of Rs 2 lakh in a financial year by investing in NPS, as per old tax regime.
Over and above the Rs 2 lakh limit, any contribution from the employer is eligible for deduction under section 80CCD (2) of the Act.