NPS Contribution for State Government Employees

Union Budget 2022 has proposed to increase the deduction limit for NPS u/s 80CCD from the existing 10% to 14% in respect of contributions made by the state government to the employee’s account, to bring parity between central and state government employees.

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What is National Pension System (NPS)? 

National Pension System (NPS) is a retirement benefits plan announced by the Indian Government to offer a regular income after retirement to all the scheme holders. NPS is being regulated and administered by PFRDA (Pension Fund Regulatory and Development Authority). 

This scheme was presented for Central Government Employees joining the service after 31st December 2004 (except for Armed forces).

Key Features of NPS 

The national pension system is based on the unique PRAN i.e., Permanent Retirement Account Number which is allocated to every policyholder. To encourage savings, the Indian Government has made this scheme reassuring from a security view and has offered some important benefits to NPS scheme account holders. 

  • Voluntary: NPS is a voluntary plan for all Indian citizens. One can invest any sum in an NPS account anytime. 

  • Regulated: NPS is governed by PFRDA which makes sure transparent norms prevail over the activities.

  • Economical: It is one of the low-cost investment products available 

  • Flexibility: You can easily change the point of presence, fund pattern, and investment pattern. This makes sure that you improve returns as per your convenience with various assets. 

  • Portability: PRAN or NPS account will remain the same regardless of the change in the city, employment, or state 

  • Tax Benefits: Get triple tax savings benefit as per the prevailing laws of ITA, 1961

    • You can claim tax exemption up to Rs. 50000 u/s 80CCD(1B). This benefit can be opted for over an above limit of Rs. 1.5lacs u/s 80C

    • You may also invest up to 10 percent of your basic salary plus dearness allowances and claim tax exemption on the capitalized amount u/s 80CCD (1). This exemption from tax is subjected to a limit of Rs. 1.5 lacs u/s 80C of ITA, 1961. 

Union Budget 2022 – NPS Contribution for State Government Employees 

Finance Minister, Nirmala Sitharaman while presenting the 2022 Union budget has projected to bring parity between the state government employees and central government employees, as far as the contribution of an employer to NPS is concerned. 

The deduction for NPS contribution of an employee has been increased to 14% from 10 % for state government Employees, but not prolonged to non-government employees. Furthermore, the contribution made by the state government into the account of NPS of state government employees will also be 14%. 

The State Government was provided an option to increase the contribution to 14 percent with effect from April 2019 on their own choice, based on their interval notifications and approvals. In order to ensure that the state government employees also receive a full deduction of the increased contribution by the state government, it is planned to increase the deduction limit for NPS contribution from 10% to 14% in respect of contribution made by the State government to the account of their employee. 

The contribution of an employer for NPS Tier-1 is entitled to tax deduction u/s 80CCCD (2) of the ITA, 1961. 

Now, state government employees can also claim a tax deduction on their employer’s contribution to their NPS of up to 14% of their basic salary and DA. Till now, this was capped at 10% for state government employees. The tax exemption limit has also raised u/s 80CCCD (2) for this sector of employees.

NPS for Individuals Vs. Government Employees

Although the general concept of NPS remains similar for all account holders, there are a few differences in their processes: 

  • Contribution: As related to the individual, the NPS contribution from the Government division is received from both the employer and employees. The monthly contribution is ten percent of the salary and Dearness Allowance (DA) to be paid by the member and the corresponding contribution by the central or state govt., which has now hiked to 14 percent of salary and dearness allowance for the government NPS contribution. 

  • Registration of Subscriber: Unlike the Point of presence., POP for individuals, in the National pension system for government employees, the form is routed by nodal officers. 

  • Process of Contribution: The NPS contribution for government employees is made by the nodal officers in a way of salary deduction and the funds are paid by the officers to the representative bank, along with the details submitted in the system. 

  • Online Accessibility: Using PRAN, government employees can access their NPS accounts. But it is quite confusing for an individual to get online access of NPS. 

  • Choice of Investments: The selection of asset groups is almost the same for both types of NPS choices such as corporate debt, equity, Alternative investment bonds, and government bonds) from which the distribution is to be mentioned under one PFM. In the case of NPS Contribution for individuals, the full contribution can be moved across the fund managers and in NPS contribution for government employees, the flow of increment is acceptable to be shifted to new fund managers. 

NPS Tax Benefits for Government Employees 

  • Tax Benefit on Contribution Amount: For the government employees, tax benefit u/s 80C is also offered on contribution towards the Tier -2 account of NPS within the Rs, 1,50,000 upper limit with a 3-year lock-in period 

  • Tax on partial withdrawal: Rules of National Pension System withdrawal for Government Employees also provide tax saving benefits if in case a partial withdrawal is done. Partial Withdrawal of up to 25 percent of the offerings done by the NPS Tier-1 account holder is free of taxes. 

  • Tax on Maturity Benefit: Lump sum withdrawal up to 60 percent of total pension during superannuation is exempted from taxes. 

At Last!

State Government Employees now will be able to claim a tax benefit of 14 percent on the NPS contribution made by their employer. This amendment will accordingly apply in relation to the taxation year 2020-21 and following taxation years to ensure that no extra tax obligation arises on any contribution that is made more than 10 percent during this time.

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