Is NPS deduction allowed under New Tax Regime: In the new tax regime, taxpayers will have to forgo most of the income tax exemptions and deductions to avail the lower tax rates. This means an employee’s contribution to provident fund, public provident fund etc will no more be available for deduction from the total income of the said individual. Further, other section 80C tax benefits on ELSS, NSC, tuition fees, home loans etc will remain suspended. However, one important deduction will still remain available for the benefit of taxpayers, which is Section 80CCD(2) of the Income Tax Act, 1961.
Section 80CCD(2) pertains to contributions made by the employer into the employee’s account of a notified pension plan such as National Pension System (NPS). Not all employers may be contributing towards your NPS account but if they do, salaried individuals may stand to gain. One may have to restructure one’s salary package if required.
The maximum deduction that can be availed by the employee is restricted to 14 per cent of salary in case of central government employees and 10 per cent for any other employee. So, if the annual basic salary of the employee is Rs 5 lakh, one can avail a deduction of up to Rs 50,000 if the employer contributes towards employees NPS account. This can well be set-off on account of the loss of Standard Deduction of Rs 50,000 in the new tax regime.
Importantly, the Deduction under section 80CCD(2) on account of the contribution made by the employer to a pension scheme is not subject to a ceiling limit of Rs. 1.5 lakh as provided under section 80CCE that includes the limit of Section 80C.
The tax benefit of Section 80CCD(2) is available only to those who are working and earning a salary income and not to a non-salaried individual. Under the new tax regime, the tax benefit on employee’s contribution towards EPF will no more be available. Out of the employer’s contribution, which anyhow does not get any tax benefit, a portion goes into the employee’s pension scheme.
Going forward, if the new tax regime becomes the only option and so with no tax benefit on PF contributions, the employees may consider moving to NPS. As of now for the financial year 2020-21, the new tax regime is only an option and one may stick to old tax regime while filing income tax returns for the assessment year 2021-22.