Budget 2021: State govt employees want employers’ entire NPS contribution of 14% tax free

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Updated: Dec 17, 2020 5:58 PM

Union Budget 2021-22 Expectations for NPS tax relief: From April 1, 2019, the Central Government has increased its NPS contribution to 14 per cent of salary, while the employees continue to contribute 10 per cent.

Budget 2021, Union Budget 2021-22, National Pension System, NPS, defined-contribution New Pension Scheme, defined-benefit Old Pension Scheme, employer's contribution to NPS, income tax, section 80CCD(2) of Income Tax ActThe additional contribution of 4 per cent made by the employer – except the Central Government – is treated as taxable take-home salary and is taxed accordingly.

Union Budget 2021-22 Expectations for NPS tax relief: Initially, since the inception of the National Pension System (NPS) in January 2004 as defined-contribution New Pension Scheme to replace the defined-benefit Old Pension Scheme for the government employees, both the employees and employers were contributing 10 percent of salary (Basic + DA).

However, from April 1, 2019, the Central Government has increased its contribution (employer’s contribution) to 14 per cent of salary, while the employees continue to contribute 10 per cent.

Accordingly, Section 80CCD(2) of the Income Tax Act was amended to increase the tax exempted contribution by the Central Government to the NPS accounts of its employees from 10 per cent of salary to 14 per cent.

Other employers availing NPS as a retirement benefit scheme for their employers – e.g. State Governments, PSU etc – were also allowed to enhance the employers’ contribution to 14 per cent.

But, except for the Central Government, the exemption limit for employers’ contribution to the NPS accounts of their employees u/s 80CCD(2) of the Income Tax Act remained 10 per cent of salary (Basic + DA).

As a result of the variation in employers’ contribution (14 per cent of salary) and its tax-free limit (10 per cent) for the employees – other than Central Government employees – having NPS as their retirement benefit scheme, the additional contribution of 4 per cent by the employer becomes taxable in the hands of such employees.

National Pension System: Higher NPS contribution enhances tax liabilities of state govt employees

Although the employer’s contribution is credited directly to the NPS account of an employee, but the additional contribution of 4 per cent made by the employer – except the Central Government – is treated as taxable take-home salary and is taxed accordingly.

The additional tax liability, over and above the tax on taxable salary, has made the aforesaid employees annoyed and they now want parity with the Central Government employees.

So, the employees of State Governments, having NPS as their mandatory retirement benefit scheme, expect that the government, in the upcoming Union Budget for 2021, would announce suitable amendments in Section 80CCD(2) of the Income Tax Act to bring parity with the Central Government employees.

“We expect that Finance Minister Nirmala Sitharaman will look into the issue and enhance the limit of tax-free employer’s contribution in our NPS accounts to 14 per cent to ease this unnecessary tax burden,” said Ram Bahadur Lal (name changed) a teacher in a UP Government school, adding, “However, our primary demand is reintroduction of the Old Pension Scheme.”

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