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Budget 2022: With NPS disparity removed, state govt employees saved from paying additional tax

In AY 2020-21, government employees of many states were shocked after receiving Form 16, as even after the tax deducted at source, they were asked to pay more tax.

Budget 2022, Union Budget 2022-23, National Pension System, NPS, employer's contribution, state government employees, TDS, Form 16
The disparity in employer's contribution between the central government employees and the state government employees has been removed in the Union Budget 2022-23.

In the Assessment Year (AY) 2020-21, government employees of many states were shocked after receiving Form 16, as even after the tax deducted at source (TDS) from their salary, there was more tax payable as per the Form 16.

The employees were asked to pay more tax as the employer’s contribution to National Pension System (NPS) for them was increased to 14 per cent from the previous contribution limit of 10 per cent, but the tax-free limit for the employer’s contribution was increased to 14 per cent only for the Central government employees, while it remained 10 per cent for the state government employees.

However, due to confusion, the additional employer’s contribution of 4 per cent by some of the state governments remained untaxed, and the employees were asked to pay the tax while filing their Income Tax Return (ITR).

So, the employees not only had to pay tax on the additional NPS contribution, but also end up paying interest on the tax payable for the delay in paying the tax.

While the additional tax was recovered through TDS in the subsequent year, the employees were still liable to pay tax on the employer’s contribution made directly to their NPS account without getting it in hand as income.

The disparity in employer’s contribution between the central government employees and the state government employees, however, has been removed in the Union Budget 2022.

“The Finance Act 2019 provided for an increase in the threshold limit for deduction u/s 80CCD of the IT Act with respect to NPS contribution from 10 per cent to 14 per cent of the salary where such contribution is made by a central government employee. For other employees, the limit of 10 per cent was applicable. However, the state governments were given an option to raise the contribution to 14 per cent w.e.f 01.04.2019 on their own volition, based on their own internal approvals and notifications, without seeking the approval of the Pension Fund Regulatory and Development Authority,” said Dr. Suresh Surana, Founder, RSM India.

“In order to ensure that the state government employees also get full deduction of the enhanced contribution by the state government, the Budget 2022 proposed to increase the limit of deduction under section 80CCD of the Act from the existing 10 per cent to 14 per cent in respect of contribution made by the state government to the account of its employee. Thus, the deduction for the state government employees u/s 80CCD would now be at par with central government employees. It is pertinent to note that once the Budget 2022 is ratified into an Act, the said amendment would apply retrospectively from 1st April, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years,” he added.

The disparity, however, still remains for the PSU employees and the employees of the private sector organisations that adopted NPS as their retirement benefit system.

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