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Explained: How corporate NPS works and offers additional tax benefits

NPS gives additional income-tax benefits if your employer offers it too. These deductions are available for old and new income-tax regimes

November 22, 2021 / 10:12 AM IST

For many individuals, obtaining tax benefits, and not retirement planning, is the primary objective of investing in the National Pension System (NPS). This despite the scheme gaining popularity in the recent years as a pure-play retirement tool. As per the Pension Funds Regulatory of Authority of India (PFRDA) data, the non-government sector subscriber base rose 2.4 lakh in the financial year 2021-22 up to August. During the same period last year, the system had seen 1.6 lakh new subscribers being added to its fold.

Do I get extra tax breaks if my employer offers NPS?

If you contribute to NPS under the All Citizens’ Model, you are eligible for deductions under section 80C, with a limit of Rs 1.5 lakh. Your contributions as an employee will also entitle you to this tax benefit. Moreover, you can claim an additional break of Rs 50,000 under section 80CCD (1B).

Now, if you are a salaried employee and your cost-to-company structure is such that your employer contributes to your NPS, you will qualify for a deduction of up to 10 percent of your salary (basic plus dearness allowance). In the case of the government sector, this deduction can go up to 14 percent. Your own contributions will continue to be eligible for deduction under section 80CCD (1) and 80CCD (1B).

All these deductions are available under the with-exemptions tax regime, but the tax exemption on employer’s NPS contribution has been retained under the new tax regime too. You, too, can contribute on your own to this account and claim deductions under sections 80C and 80CCD(2). After the Union Budget 2021 announced that the interest on EPF contributions in excess of Rs 2.5 lakh a year will be taxed, many experts recommended that employees invest this excess amount in NPS.

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Will I get income-tax benefits over and above EPF deductions via the corporate NPS?

Your employer can contribute to your NPS over and above the employees’ provident fund (EPF). Employees or employers need not to choose one over the other. This is eligible for tax benefits under section 80CCD (2). As an employee, you can transfer the account that is tagged to a permanent account number (PRAN), to another employer when you switch jobs. Alternatively, you can continue investing on your own through the All Citizens Model. Depending on your employer’s policy, NPS investment management charges, custodian fees, transaction charges and so on will have to be borne either by you or the employer.

NPS is mandatory for all central government employees, except the armed forces, who joined after January 1, 2004. Most state governments, too, have adopted it. Under the corporate model, it is open to private organisations. Employers’ contribution of up to 10 percent of employees’ salary is treated as business expense and allowed as deduction from their profit and loss account.

NPS withdrawal rules remain the same – at the age of 60, you can withdraw 60 percent of the corpus as lump-sum. The balance 40 percent has to be compulsorily converted into annuities, which will be used to pay you pension post retirement. You can make partial withdrawals of up to 25 percent of your own contributions after three years in case of certain critical illnesses, purchase of property, children’s education and so on.

Employers can either choose from the eight pension fund managers or allow employees to make the selection. If your employer adopted the system after January 2018 and picked the pension fund manager, you will have the option to switch to another player after a year.

Can all companies offer corporate NPS to their employees?

Organisations registered under the Companies Act, 2013 or registered co-operative societies can contribute to their employees’ NPS. Government and affiliated organisations, too, can adopt the corporate model, besides public sector enterprises. Registered partnership firms, proprietary concerns and certain foreign companies (for eligible Indian employees) are also eligible.
Preeti Kulkarni is a financial journalist with over 13 years of experience. Based in Mumbai, she covers the personal finance beat for Moneycontrol. She focusses primarily on insurance, banking, taxation and financial planning
first published: Nov 22, 2021 10:12 am

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