Updated: March 02, 2022, 15:40 IST

Finance Minister Nirmala Sitharaman announced that state government employees will now be able to claim tax benefits of 14 percent on the National Pension System (NPS) made by their employer from financial year 2022-23. “Under the existing provisions of the Act, any contribution by the Central Government or any other employer to the account referred to in section 80CCD of the Act (NPS account), shall be allowed as a deduction to the assesses in the computation of his total income, if it does not exceed 14 percent of his salary where such contribution is made by the Central Government. This limit is presently 10 percent of his salary where such contribution is made by any other employer. The State Governments were given the option to raise the contribution to 14 percent w.e.f 01.04.2019 on their own volition, based on their own internal approvals and notifications, without seeking the approval of the Pension Fund Regulatory and Development Authority," the Budget Memorandum mentioned.

At present, only the central government employees are allowed to claim a tax benefit of 14 percent for the employer’s contribution to their NPS accounts.

NPS Tax Benefits: State Government Employees Must Know

1) You can claim tax benefits on your contribution and employer’s contribution towards the National Pension System under various sections of the Income Tax Act, 1961. State government employees can claim a tax exemption of up to Rs 1.5 lakh for the contribution towards the NPS fund under Section 80CCD(1). For private sector employees, the tax benefit is restricted to 10 percent.

2) Further, employees can also claim an additional deduction of up to Rs 50,000 for contributing to NPS under Section 80CCD (1b). Only those investing in Tier 1 NPS accounts, will be able to claim this additional deduction of Rs 50,000. No tax benefits are available for those investing in Tier 2 NPS funds.

So, taxpayers can claim a tax exemption of up to Rs 2 lakh in a financial year by investing in NPS. The mentioned tax deductions will be available if one opts to pay income tax via the old income tax regime.

3) Now, salaried employees are also eligible to claim tax exemption for employer’s contributions towards NPS under Section 80CCD (2) of the Income Tax Act. Now, both the central government and state government employees will be able to claim a tax benefit of 14 percent on the NPS contributed by their employers. It must be noted that the employer’s contribution to the employee’s NPS account will become taxable if the employer’s contribution to the NPS account, EPF and superannuation exceeds Rs 7.5 lakh in a financial year.

NPS New Tax Exemption Rule: When will it be Applicable?

This new rule will come into effect retrospectively from April 1, 2020. So, state government employees can benefit from this tax exemption for Assessment Year 2020-21 and the subsequent years that followed.

How Will this Move to Benefit the State Government Employees?

“Employer contributions to NPS are eligible for deduction u/s 80 (CCD)(2) however limited to 10 percent of salary as defined. For central government employees, this was available up to 14 percent of salary, and this benefit has now been extended to state government employees as well. However, this benefit has not been extended to non-government employees where the limit of 10 percent continues to apply," said Saraswathi Kasturirangan, Partner, Deloitte India.