Know about Employer's Contribution to NPS

Q: Is the employerâs contribution to NPS taxable?

Yes, the employerâs contribution to NPS is taxable under Section 17(1) of the Income Tax Act. However, there are deductions available under Section 80CCD(2) that offset its taxability.

Q: How can an employer report their NPS contributions in the Profit and Loss statement?

Employers can record their contributions to employeesâ NPS accounts as a business expense in the Profit and Loss account under Section 36(1)(iv)(a), reducing their taxable business income.

Q: How can I check my employerâs contribution to my NPS account?

You can check your employerâs contributions by logging into the NPS mobile app or visiting the NSDL website and viewing your account details.

Employer Contributions to NPS: What You Need to Know

The National Pension System (NPS) allows both you and your employer to contribute towards your retirement savings. Employer contributions can significantly enhance your retirement corpus while also offering additional tax benefits. This article explains how employer contributions to NPS work, their tax treatment, and what you need to know to make the most of this opportunity.

What is the Employer's Contribution to NPS?

An employer can contribute a portion of an employee's salary to their NPS account. This amount is usually calculated as a percentage of the employee's Basic Salary plus Dearness Allowance (DA). While such contributions are optional for most private employers, they are mandatory for government employers as part of the NPS framework.

The employer contribution is treated as a business expense and qualifies for tax deductions. This added amount increases the employee's retirement savings and helps in creating a stronger financial base for the future. Over time, it helps build a substantial retirement corpus, making NPS a valuable tool for long-term financial planning.

Tax Benefits of NPS

The National Pension Scheme (NPS) offers clear tax benefits on employer contributions, making it a reliable retirement plan for long-term savings.

Section 80CCD(2): Employer's Contribution

Who gets this benefit: Salaried employees whose employer contributes to their NPS

How much deduction is allowed:

Old tax regime: Up to 10% of salary (Basic + DA)
New tax regime: Up to 14% of salary (Basic + DA)

How it's treated: This benefit is over and above the deductions you get for your own contributions

Example:

Varun earns ₹10,00,000 a year as Basic Salary and DA

His employer contributes ₹1,00,000 (10%) to his NPS account

This full amount is allowed as a deduction under Section 80CCD(2)

It does not affect the ₹2 lakh that Varun may already claim through his own investments

This gives him extra tax savings, without using up his personal deduction limit

Wrapping Up

Employer contributions to the NPS account are an important part of building a solid retirement fund. These contributions, whether voluntary or mandatory, offer great benefits to employees. With tax deductions available for both employee and employer contributions, NPS is an excellent option for securing your future. Understanding these benefits can help you make the most of the scheme and ensure a comfortable retirement.

FAQ's

Is the employer’s contribution to NPS taxable?

Yes, the employer’s contribution to NPS is taxable under Section 17(1) of the Income Tax Act. However, there are deductions available under Section 80CCD(2) that offset its taxability.

Can I claim deductions under both Section 80CCD(1B) and 80CCD(2)?

Yes, you can claim deductions separately for your contributions under Section 80CCD(1B) and for your employer’s contributions under Section 80CCD(2). This allows you to maximise your overall tax benefit.

What differentiates Section 80CCD(1) from Section 80CCD(1B)?

Section 80CCD(1) allows a tax deduction of up to 10% of your salary within the overall ₹1.5 lakh limit under Section 80CCE. Section 80CCD(1B) provides an additional deduction of ₹50,000 exclusively for NPS contributions, over and above the ₹1.5 lakh limit.

Is the employer’s contribution to NPS included in the gross salary?

Yes, employer contributions are considered part of your gross salary under Section 17(1). However, these contributions are eligible for deduction under Section 80CCD(2), reducing your taxable income.

What investment proof is needed for claiming tax benefits on NPS?

To claim tax benefits, you can submit your NPS account transaction statements or official receipts showing your contributions made during the financial year as proof.

Do Tier 2 NPS accounts offer any tax benefits?

No, currently, contributions to NPS Tier 2 accounts do not qualify for any tax deductions or benefits under the Income Tax Act.

How can an employer report their NPS contributions in the Profit and Loss statement?

Employers can record their contributions to employees’ NPS accounts as a business expense in the Profit and Loss account under Section 36(1)(iv)(a), reducing their taxable business income.