Over the years, the government has introduced many changes to the National Pension System (NPS) to the add to the appeal of this retirement benefit scheme. The latest move came in the Budget with the Finance Minister announcing a hike in the tax deduction limit – from 10 per cent to 14 per cent on employer’s contribution to the NPS – for State government employees. This was done to bring parity between Central and State government employees.

What’s changed

Under Section 80CCD of the Income Tax Act, an employee can claim his employer’s contribution to the NPS as deduction while calculating his taxable income. Currently, the Central government contributes 14 per cent of the salary (basic plus dearness allowance) of its employees to the NPS Tier I. A Central government employee can claim this 14 per cent as deduction. As regards State government employees, irrespective of the State government’s contribution to the NPS, they can claim deduction only to the extent of 10 per cent. Private sector employees too can claim deduction only up to a maximum of 10 per cent.

Once the latest Budget proposal is put into effect by amending Section 80CCD, State government employees will be allowed the higher 14 per cent limit. That the change is retrospective, implies that State government employees can claim this higher deduction even for 2020-21 by filing revised returns. But, they must weigh the costs and benefits - the additional tax savings versus the hassle of re-filing returns – before they go down this road.

What’s not

However, nothing has changed for private sector employees subscribing to the scheme through their employer under the corporate NPS model. The amount of deduction that they can claim to arrive at their taxable income remains capped at 10 per cent irrespective of the employer’s contribution.

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