Employer Contribution to NPS: A Detailed Guide
- Dipali Waghmode
- Feb 27
- 7 min read
Retirement planning is essential to safeguarding your future since it significantly influences the quality of life you will lead in your later years. Employer contributions are a notable feature of the National Pension System (NPS), which is significant in India for its flexible approach to retirement corpus building. This article will discuss the benefits, operational dynamics, and importance of employer contributions to NPS. The policies pertaining to employer and employee NPS contributions will also be examined to determine how these NPS Employer Contributions affect investment returns.
Table of Content
What is Taxable Salary?
Section 17 of the Income-tax Act states that there must be an employer-employee relationship for a payment to be considered a salary. A taxable salary under the Income-tax Act comprises:
Taxable gratuity
Pensions
Instead of a salary, commission, benefits, or profit
Salary advance
Taxable encashment of leave
PF that is taxable
Payment made to the employee's pension account as specified in Section 80CCD
As a result, your taxable salary includes any payments your employer makes to your NPS account. In contrast, section 17(1) states that your employer's PF payment will not be part of your salary.
What is the Employer’s Contribution to NPS?
An employee's NPS account may get a portion of their pay from their employer. This contribution usually takes the form of a percentage of the worker's Dearness Allowance (DA) plus Basic Salary. Government employees must contribute, but most firms can choose not to. Employer contributions are tax-deductible since they are business expenses. This extra contribution helps the employee accumulate a sizeable corpus for their post-retirement life and increases their retirement savings.
How much is the Employer's Contribution to the NPS?
The maximum amount corporate employers can contribute monthly to an employee's account is 10% of their base pay plus DA. However, the general guideline for the employer NPS contribution cap is 14% for employees of the Central Government or banks. Since your tier-1 account will draw long-term compounded earnings from market instruments, saving through the National Pension Scheme will be essential. Additionally, investing in NPS can provide you with tax savings of up to Rs. 2 lakhs.
Calculation of Employer Contribution to NPS
Employer contributions to the National Pension System (NPS) under the NPS program are derived using a methodical procedure to guarantee precise and legal funding for workers' retirement plans. Typically, employers contribute up to 10% of an employee's Basic + Dearness Allowance (DA) to the NPS. The total employer contributions to the Provident Fund (PF), Superannuation, and NPS is Rs 7,50,000. Employers must evaluate the employee's gross income to calculate the contribution % in detail.
Taxation of NPS
NPS is eligible for tax deductions under Sections 80CCD(1), 80CCD(1B), and 80CCD(2).
Section 80CCD(1)
The maximum deduction allowed by this Section is 10% of the employee's base pay plus DA paid toward NPS the year before. The maximum deduction amount for a particular fiscal year is Rs 1.5 lakhs. Notably, only during the previous administration was this deduction permitted.
Section 80CCD (1B)
The maximum deduction allowed by this provision is Rs 50,000. This cap exceeds the Rs 1,50,000 cap stipulated in Section 80C. It is crucial to remember that 80CCD(1) and 80CCD(1B) are donations made by employees to NPS. An employee may use the additional Rs 50,000 limit under 80CCD(1B) if they have used up the Rs 1.5 lakhs maximum [80C+80CCD(1)]. Like the deduction under Section80CCD(1), this deduction was also permitted only during the previous administration,
Section 80CCD (2)
Salaried people are eligible to deduct the following under this Section:
A maximum of 14% of their base pay plus DA is deducted for NPS by the federal or state governments.
Old Tax Regime: Any other employer's NPS contribution may be deducted up to 10% of the employee's base pay plus DA.
New tax Regime: The new tax regime allows for a maximum deduction of 14% of their base pay plus any DA paid to NPS by any other employer.
The maximum amount an employer can contribute to PF, NPS, and superannuation is Rs 7,50,000. Therefore, under Section 17(2) of the Income-tax Act, any contribution made by the employer more than the cap shall be deemed taxable as perquisite. Note that both regimes allow for this deduction.
Deduction on Both Employee and Employer’s Contributions
A deduction under Section 80CCD(2) is available if your employer contributes to your NPS account. Although you are not limited to money, you should not claim more than 10% of your base pay under the previous regime and 14% of your base pay under the current one. The total amount the employer contributes to NPS, PF, and superannuation combined, however, is limited to Rs 750,000. Any extra money will be subject to taxes.
Section 80CCD(1) or Section 80CCD(1B) allow you to claim a deduction for your contributions, which are employee contributions. Section 80CCD(1B) offers an extra deduction of Rs 50,000 on top of the Rs 1.5 lakhs allowed in Section 80C.
NPS Employer Contribution Tax Benefit
There are substantial tax advantages to the National Pension System (NPS), especially when considering employer contributions. Section 80CCD(2) of the Income Tax Act allows employers to receive tax benefits through contributions to their employees' NPS accounts. Employers contribute up to 10% of the worker's dearness allowance (DA) and base pay. Contributions to the Provident Fund (PF), superannuation, and NPS are all included in the Rs 7.5 lakh maximum deduction allowed under Section 80CCD(2).
Employers can structure employee benefits packages to include NPS contributions and other retirement benefits like PF and superannuation. It is a deductible business expense that lowers the employer's taxable income. Employers who contribute to the NPS receive tax benefits and improve their employees' retirement benefits. While maintaining below the allowed limits, employers can think about optimizing NPS contributions to maximize tax benefits. Employers should encourage employee loyalty and satisfaction by clearly communicating the enhanced retirement benefits through NPS contributions.
Conclusion
Employer contributions supplement your savings, and the National Pension System provides a flexible and well-organized approach to retirement preparation. By making the most of these advantages and remaining aware of your employer's contribution requirements, you may contribute to securing a safe and fulfilling future for yourself. You may guarantee a healthy retirement fund and stability in your later years by utilizing employer contributions and how they affect your investing performance.
FAQ
Q1. Is the employer's contribution to NPS taxable?
Section 17(1) of the Income Tax Act makes an employer's NPS payment taxable.
Q2. Is it mandatory for the employer to contribute to the NPS?
Employer contributions to the NPS are optional rather than required. However, a lot of businesses now offer the NPS service so that they can benefit from tax benefits under Section 36(i)(IV) of the Income Tax Act of 1961. The government views regular contributions as tax-deductible revenue since they fall inside the business's allowable expense deductions. It lowers employers' tax burden in addition to promoting NPS membership.
Q3. Is the NPS mandatory for PSU employees?
All employees of the Central Government are required to take the NPS. Additionally, all state governments have decided to offer their employees the advantages of the National Pension Scheme. However, the business shall contribute no more than 14% of the employee's monthly income to the employee's NPS account. Employers themselves set up the CRA system to track NPS transactions for government workers. Workers can monitor the statement because the Nodal Office periodically updates the specifics.
Q4. Is the employer's contribution to NPS added to gross salary?
Indeed, following Section 17(1) of the Income Tax Act, the employer's NPS contribution is added to the gross salary. You may, however, claim a deduction under 80CCD(2), negating the effect.
Q5. How can I check my employer’s contribution to NPS?
You can visit the NSDL website or the NPS mobile app to determine how much your employer contributes to NPS.
Q6. What is the difference between 80CCD(1) and 80CCD(1B)?
The contributions to NPS made by employees and taxpayers are 80CCD(1) and 80CCD(1B). Employees who have used up the Rs 1.5 lakhs 80CCD(1) limit may use the Rs 50,000 additional limit under 80CCD(1B).
Q7. Can I claim both 80CCD 1B and 80CCD 2?
Indeed, employer contributions are covered by 80CCD(2), whereas employee contributions are by 80CCD(1B). You can claim a deduction under both sections.
Q8. Does NPS tier 2 account get tax benefits?
No, holders of Tier 2 NPS accounts are not currently eligible for any tax benefits.
Q9. How can an employer show their contribution to the NPS account under the P&L account?
An employer can record their NPS payment under "Business Expense" on the profit and loss statement.
Q10. What is the investment proof required to get tax benefit for NPS?
You can submit a transaction statement as proof of investment. On the other hand, if you have a receipt for the money you put into your Tier 1 account for the relevant year, it can also serve as proof of investment.
Q11. What is the employer's contribution to NPS, and how does it benefit employees?
The employer contributes a percentage of an employee’s basic salary plus dearness allowance to NPS, offering retirement benefits and tax savings.
Q12. Is employer contribution to NPS mandatory?
No, it is voluntary. However, many companies offer it as part of their salary structure to provide tax benefits and long-term savings for employees.
Q13. What is the maximum employer contribution allowed under NPS?
Employers can contribute up to 10% of the employee’s basic salary and dearness allowance in the private sector and up to 14% in the government sector.
Q14. How is employer contribution to NPS taxed?
Employer contributions are tax-free up to 10% of salary (14% for government employees) under Section 80CCD(2), with no upper monetary limit.
Q15. Can employees contribute to NPS in addition to the employer's contribution?
Yes, employees can make voluntary contributions and claim additional tax benefits under Sections 80CCD(1) and 80CCD(1B).
Q16. Does employer contribution to NPS affect take-home salary?
If included as part of the CTC, it may reduce the cash component but provides higher tax savings and long-term retirement benefits.
Q17. Can an employer stop contributing to NPS after enrolling an employee?
Yes, unless it is part of a contractual agreement. However, discontinuing contributions may affect an employee’s retirement savings plan.
Q18. How can employees check their employer's NPS contributions?
Employees can log into their CRA (Central Recordkeeping Agency) account and check the contribution details in their NPS transaction statement.
Q19. What happens to the employer's NPS contribution if an employee switches jobs?
The NPS account remains active, and the new employer can start contributing. Employees can also continue contributing independently.
Q20. Can self-employed individuals benefit from employer contribution to NPS?
No, employer contributions apply only to salaried employees. However, self-employed individuals can contribute to NPS and claim tax benefits under Section 80CCD(1).
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