Know About Your Employer’s Contribution to NPS

In 2004, the National Democratic Alliance (NDA) replaced the Old Pension Scheme with the National Pension Scheme, called NPS. It is an easily available, low cost and tax-efficient retirement saving scheme. It is an investment cum pension plan introduced by the government for all individuals. Unlike other plans, there’s no fixed amount promised at the end. The final amount you get when you retire depends on how much you and your employer have contributed, how well those contributions have grown, and how long you’ve been saving. Generally, the more you save and the longer you save, the more money you’re likely to have in the end.

Contributions + Investment Growth – Charges = Accumulated Pension Wealth (Individual contribution as well as Employee contribution)

Employer Contribution to NPS 

As per the PFRDA, the government sector employees automatically receive the NPS Contribution from the employer, either the state government or central government but in the case of corporate sector employees, it is entirely the will of the employer whether to contribute or not. 

• The maximum employer contribution in the government sector is 14% of the salary (Basic + DA) contributed by the Central Government and State Government to the employee’s NPS account.
• If you are a corporate sector employee, then the employer’s contribution to NPS can be 10% of the salary (Basic + DA).

Tax Benefits of Employer’s Contribution to Employee

As per Section 80CCD(2) of the Income-tax Act, 1961, contribution by the employer to the NPS is deductible in the hand of the concerned employee in the year in which the contribution is made. 

However, no deduction is made of more than 10% of salary (Basic + DA) in the case of corporate sector employees and 14% of salary (Basic + DA) in the case of government employees. 

Tax Benefit to the Employer for Employer Contribution Towards NPS

This benefit is exclusively available for the Corporate Sector NPS. Corporates can leverage tax benefits under section 36 (i) (IV) of the Income-tax Act, 1961, on their contributions towards NPS. Up to 10% of salary (Basic + DA) can be claimed as a deductible ‘Business Expense’ from their Profit & Loss Account.

Conclusion

Under the New Pension Scheme, in the corporate sector, it totally depends on your employer if they want to contribute towards the employees’ NPS. If they opt to do so, the company will get the taxation benefits. It is advised to have transparent communication with your employer before choosing a job.

Frequently Asked Questions (FAQs)