March 22

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Tax exemption limit for employers’ contribution to NPS for State Govt. employees hiked to 14%


The Union Finance Minister Nirmala Sitharaman announced in Budget 2022 that State Government employees can now avail a tax benefit of 14% on their employers’ NPS contribution. Only Central Government employees could avail a tax benefit of 14% for the employers’ contribution to the National Pension Scheme till now. 

This hike in tax benefit limit will be effective from the fiscal year 2022-23 and will help State Government employees to save on their income tax. Go through the following sections to know more. 

Tax deduction benefits for NPS contribution

The decision to raise the limit for tax deduction on NPS for employers’ contribution from 10% will bring the State Government employees at par with Central employees in terms of social security benefits. Investments in the NPS come with tax deductions under three sections of the IT Act. 

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You can claim a tax deduction under Section 80CCD(1) for NPS investment of up to Rs. 1.5 lakh. However, this deduction will be inclusive of the maximum deduction limit of Rs. 1.5 lakh u/s 80C. 

You are also eligible for an additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B). This deduction will be over and above the deductions applicable as per Section 80C. This additional deduction is only applicable if you invest up to Rs. 50,000 in an NPS Tier I account. Thus, you can claim a total of Rs. 2 lakh tax deduction each financial year through NPS investment.

The contributions that your employers make towards NPS can also bring tax deduction benefits under Section 80CCD(2). Your employers’ contribution to NPS is taxable if the overall contribution in NPS, EPF and superannuation goes beyond Rs. 7.5 lakh. 

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As of now, only Central Government employees could avail a tax benefit of up to 14% of salary for employers’ contribution to NPS. For all other employers, this rate stands at 10%. The new announcement during the Union Budget of 2022 will allow State Government employees to get a 14% tax deduction for contributions made by the state to one’s NPS account. 

However, this tax benefit option has not been provided to non-government employees. The limit for availing tax benefits for employers’ contribution to NPS stands at 10% of the salary.

How will this benefit the employees? 

According to experts, this hike in the tax deduction limit for employers’ NPS contributions will help to ease your income tax burden. Moreover, due to the additional 4% contribution each year, your NPS corpus would see an additional increase, considering a 10% return over a period of 30 years. 

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Other tax deductions on NPS

In addition to the above-mentioned tax benefits, here are some other tax benefits that are associated with NPS contribution: 

  • Tax benefit for self-contribution

For self-contribution to NPS, you can avail tax deduction of up to 10% of your salary with a maximum limit of Rs. 1.5 lakh as per Section 80CCE. In addition, you will get an extra tax deduction of up to Rs. 50,000 as per Section 80 CCD(1B). 

  • Tax benefit for annuity purchase and partial withdrawal

You are eligible for tax exemption if you withdraw 25% of your self-contribution. Such tax exemption is also available for purchasing annuity after the age of 60 years. 

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Apart from NPS, there are multiple other investment options that will help you save your income tax burden. These include fixed deposits, various health insurance policies and others. You can opt to invest in these tax-saving options through Finserv MARKETS. On this online platform, individuals can compare and find a suitable option as per their financial goals.

To wrap up, paying income tax without fail is imperative, and as per the IT slab prescribed by the government. However, investment instruments like NPS enable you to lower your income tax liabilities and save more. So plan your income tax wisely to leverage the maximum benefit.

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