Contribution to National Pension System (NPS) account qualifies for deduction under Section 80CCD of the Income Tax Act for both State and Central Government Employees. Before Finance Act 2022, any contribution over 10% of salary to the NPS account of state government employees was taxable. In the case of Central Government Employees, there was no tax on contributions up to 14%. The Finance Act 2022 has ended this discrepancy.
The Central Board of Direct Taxes (CBDT) recently issued explanatory notes on the provisions of the Finance Act 2022, which explains how the tax treatment of NPS contribution is now the same for both state and Central Government Employees. This article looks at what the CBDT has said:
“Under the existing provisions of the Act, any contribution by the Central Government or any other employer to the account referred to in section 80CCD of the Act (NPS account), shall be allowed as a deduction to the assesses in the computation of his total income, if it does not exceed 14% of his salary where such contribution is made by the Central Government. This limit is presently 10% of his salary where such contribution is made by any other employer,” CBDT said.
As per the CBDT notes, the State Governments were given the option to raise the contribution to 14% with effect from 1st April 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 (PFRDA).
However, the provisions of section 80CCD resulted in the amount contributed in excess of 10% being taxed in the hands of the employee.
“In order to ensure that the State Government employees also get a full deduction of the enhanced contribution by the State Government, the limit of deduction has been increased under section 80CCD of the Act from the existing ten per cent to fourteen per cent in respect of contribution made by the State Government to the account of its employee,” the CBDT said.
The amended rule is effective retrospectively from 1st April 2020 and applies in relation to the assessment year 2020-21 (FY2019-20) and subsequent assessment years.