Investment in Tier-I account of National Pension System (NPS) via your employer allows you to claim a deduction from your gross total income under the Income-tax Act even under the new lower tax regime. The deduction can be claimed under section 80CCD (2).
How to avail deduction under section 80CCD (2)
To avail the deduction under section 80CCD (2), an employer is required to contribute to the employee's Tier-I NPS account. Dr Suresh Surana, founder, RSM India says, "The deduction under section 80CCD (2) can be claimed only if your employer makes such a contribution. If your employer does not offer the NPS benefit, then you will not be able to claim the deduction under 80CCD (2)."
How much deduction can be claimed by you?
Dr Surana says, "There is no restriction on the amount that can be contributed by an employer to the Tier-I NPS account of an employee. However, the maximum deduction that is allowed under the current income tax law cannot exceed more than 10 per cent of the employee's salary."
Remember, for the calculation of this 10 per cent, salary includes basic and dearness allowance. Usually, dearness allowance is paid to only government employees.
The amount of deduction that can be claimed in a financial year can be explained via an example. Suppose your monthly basic income is Rs 60,000 and you are not receiving any dearness allowance. If your employer deposits Rs 6,000 per month, i.e., 10 per cent of your monthly basic salary, then maximum deduction that can be claimed by you is Rs 6,000 for every month the deposit has been made in a financial year.
What if the contribution exceeds 10 per cent?
If the total amount of your NPS contribution made by your employer exceeds 10 per cent of your basic salary per annum then the excess amount will be taxable in the hands of an employee. Dr Surana says, "The contribution made by an employer in the employee's NPS account in excess of the limit (mentioned above) will be taxable under the head salary."
How much tax can be saved?
The amount of tax that can be saved under section 80CCD (2) depends on the employer's contribution subject to the limit mentioned above and the income tax rate applicable to your income.
How to claim tax benefit under section 80CCD (2)
Dr Surana says, "To claim the tax benefit, first the employer's contribution will be added to your gross salary and then the deduction will be claimed under section 80CCD (2). The Form-16 given by your employer will contain all the details of your gross salary and the total amount of tax benefit available under section 80 CCD (2)."
Make sure contribution does not exceed Rs 7.5 lakh in a financial year
From the financial year 2020-21, a monetary limit has been imposed on the tax-exempt contribution made by an employer to the Employees' Provident Fund (EPF), NPS and the superannuation fund of an employee. As per the new income tax law, if the employer's total contribution in EPF, NPS and superannuation fund of an employee in a financial year exceeds Rs 7.5 lakh on an aggregate basis, then the excess amount will be taxable in the hands of the employee.
Dr Surana says, "Irrespective whether you opt for the new tax regime or old tax regime, an employee should note that if the total employer's contribution to EPF, NPS and superannuation fund exceeds Rs 7.5 lakh in a financial year, then such excess would be taxable in the hands of the employee. Further, the gains accrued on the excess contribution will also be taxable in the employee's hands."
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