Initially, because the inception of the National Pension System (NPS) in January 2004 as defined-contribution New Pension Scheme to replace the defined-advantage Old Pension Scheme for the government staff, each the staff and employers had been contributing 10 % of salary (Basic + DA).
However, from April 1, 2019, the Central Government has enhanced its contribution (employer’s contribution) to 14 per cent of salary, even though the staff continue to contribute 10 per cent.
Accordingly, Section 80CCD(2) of the Income Tax Act was amended to raise the tax exempted contribution by the Central Government to the NPS accounts of its staff from 10 per cent of salary to 14 per cent.
Other employers availing NPS as a retirement advantage scheme for their employers – e.g. State Governments, PSU and so on – had been also permitted to improve the employers’ contribution to 14 per cent.
But, except for the Central Government, the exemption limit for employers’ contribution to the NPS accounts of their staff u/s 80CCD(2) of the Income Tax Act remained 10 per cent of salary (Basic + DA).
As a outcome of the variation in employers’ contribution (14 per cent of salary) and its tax-no cost limit (10 per cent) for the staff – other than Central Government staff – obtaining NPS as their retirement advantage scheme, the further contribution of 4 per cent by the employer becomes taxable in the hands of such staff.
National Pension System: Higher NPS contribution enhances tax liabilities of state govt employees
Although the employer’s contribution is credited straight to the NPS account of an employee, but the further contribution of 4 per cent produced by the employer – except the Central Government – is treated as taxable take-property salary and is taxed accordingly.
The further tax liability, more than and above the tax on taxable salary, has produced the aforesaid staff annoyed and they now want parity with the Central Government staff.
So, the staff of State Governments, obtaining NPS as their mandatory retirement advantage scheme, anticipate that the government, in the upcoming Union Budget for 2021, would announce appropriate amendments in Section 80CCD(2) of the Income Tax Act to bring parity with the Central Government staff.
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“We expect that Finance Minister Nirmala Sitharaman will look into the issue and enhance the limit of tax-free employer’s contribution in our NPS accounts to 14 per cent to ease this unnecessary tax burden,” mentioned Ram Bahadur Lal (name changed) a teacher in a UP Government college, adding, “However, our primary demand is reintroduction of the Old Pension Scheme.”