As per the existing rules, any employer that contributes to the employee’s NPS account faces an income tax deduction up to a fixed percentage of salary (basic + dearness allowance), irrespective of any limit, under Section 80 CCD(2). The limit for central government employees is 14 percent of salary and for others, it is 10 percent. Employers’ contribution of 14 percent in pension under NPS for the central government employees was made tax free with effect from April 1, 2019.
If the proposal is approved, all employers’ contribution of 14 percent will be made tax free. Right now, the 14 percent limit applies only to the central government employers. The state governments have been demanding a 14 percent tax benefit too.
In addition, the PFRDA proposes to extend the benefit of tier-II NPS account and make it tax-free for all subscribers. Recently, this was done for the Central government employees under Section 80C.
A Central-government employee’s contribution to a tier-II NPS account — which is not a compulsory account — to avail income tax deduction of up to Rs 1.5 lakh annually, has a three-year lock-in period.
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