Corporate NPS: How employer contributions can reduce your tax liability under new regime

New Delhi: With the introduction of the new tax regime, employees had to give up many deductions available under the old tax regime, such as House Rent Allowance (HRA), Section 80C and home loan interest. However, one crucial exception is the employer's contribution to NPS. Tax deductions available for Corporate NPS have been retained, helping to close the gap between government and private-sector employees.

Employees looking for ways to reduce their taxable income should delve into the provisions for the National Pension System (NPS). Its impact on one's salary would depend on their annual income and the employer's contribution.

Employees who opt for Corporate NPS, if provided by their company, have a dual benefit in the form of reduced tax liability and retirement savings. Under Section 80CCD(2), the employer's contribution to the employee's NPS account is eligible for a tax deduction. The employer can claim the annual contribution as a business expense. For the employee, this amount is included in salary income but is eligible for a deduction while computing taxable income.

Thus, salaried employees who are enrolled in Corporate NPS can avail themselves of the tax benefits available under Section 80CCD(2).

How is it different from the old regime?

Under the old tax regime, the deductions available to government and private-sector employees differed significantly. The revision has bridged the gap and made the deduction equally beneficial to both.

Government-sector employees: Under the old tax regime, eligible employees can claim a deduction on the employer's NPS contribution of up to 14 per cent of their basic salary and Dearness Allowance (DA). The same tax benefits are available under the new tax regime.

Private-sector employees: Under the old tax regime, private-sector employees could claim a deduction of up to 10 per cent of their basic salary and Dearness Allowance (DA) on the employer's NPS contribution. The limit has been revised under the new regime and now stands at 14 per cent of their basic salary and Dearness Allowance (DA).

Employees should know that if the combined contributions made by an employer to NPS, EPF and approved superannuation fund accounts exceed ₹7.5 lakh in a financial year, the excess amount would be taxable as a perquisite.

Benefits of Corporate NPS

If an establishment provides Corporate NPS, it can be beneficial for employees, particularly under the new tax regime, in which most tax deductions are not available.

Employees can restructure their total salary by routing a part of it towards NPS contributions. This would reduce their tax liability under the applicable provisions if the employer also makes contributions. Moreover, Corporate NPS would help build a retirement corpus, allowing employees to accumulate funds through their own as well as their employer's contributions.