Proposal to make employers’ contributions to NPS tax free

Presently, state government employers as well as corporate entities face a deduction under Section 80 CCD(2) if they are contributing to the employees’ NPS account

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Pension Fund Regulatory and Development Authority (PFRDA) proposes that the employers’ contribution of 14 per cent under the National Pension Scheme (NPS) be made tax free for all categories of employers, irrespective of whether they are private entities or state government.

As per the existing rules, any employer that contributes to the employee’s NPS account faces an income tax deduction up to a fixed percentage of salary (basic + dearness allowance), irrespective of any limit, under Section 80 CCD(2). The limit for central government employees is 14 per cent of salary and for other it is 10 per cent. Employers’ contribution of 14 per cent in pension under NPS for the central government employees was made tax free with effect from April 1, 2019.

If the proposal is approved, all employers’ contribution of 14 per cent will be made tax free. Right now, the 14 per cent limit applies only to the central government employers. The state governments have been demanding 14 per cent tax benefit too.

In addition, the PFRDA proposes to extend the benefit of tier-II NPS account and make it tax free for all subscribers. Recently, this was done for the Central government employees under Section 80C.

A Central-government employee’s contribution to a tier-II NPS account — which is not a compulsory account — to avail income tax deduction of up to Rs 1.5 lakh annually, has a three-year lock-in period.