Contributions made by subscribers to the government’s pension scheme NPS are exempt from income tax. Even employer’s contributions are also exempt up to a limit.
In the Budget 2022, the finance minister Nirmala Sitharaman raised the tax exemption limit on employer’s contribution from 10 percent to 14 percent for state government employees.
This was done to bring them on a par with the central government staff who are already entitled to an exemption limit of 14 percent.
Exemption on contribution
The subscribers of National Pension System (NPS) can claim tax exemption under section 80CCD (1) within the total limit of ₹1.5 lakh.
What, however, is like a frosting on the cake is a provision of additional deduction of ₹50,000 over and above this limit of ₹1.5 lakh.
This is given under section 80CCD 1(B) and only for contribution to NPS Tier 1 account whereas for contribution to NPS tier 2 account, no exemption is allowed.
Let us first understand what are tier 1 and tier 2 accounts. The pension scheme subscribers can operate two accounts: tier 1 & tier 2. The first one is mandatory, while the tier 2 account is optional with no compulsion to contribute.
The key difference between the two accounts is that withdrawal is usually not permitted in the tier-1, but the tier 2 is flexible about early withdrawals.
For government employees
The national pension scheme has been effective for the central government employees (barring the armed forces employees) since January 1, 2004.
Following this, government employees are supposed to make a monthly contribution towards the scheme at the rate of 10 percent of their salary. At the same time, an equivalent amount of contribution is given by the employer i.e., government.
Under section 80CCD (2) of the Income Tax Act, this employer’s contribution is also eligible for tax deduction.
For central government employees, the employer’s contribution rate was raised to 14 percent starting April 1, 2019.
And now in the Budget 2022, the Union finance Minister Nirmala Sitharaman raised this limit of 14 percent for the state government employees as well.
It is noteworthy to mention that the NPS tax benefit relating to employer’s contribution with regards to private sector employees is still capped at 10 per cent.