The tax deduction limit for state government employees has been increased from 10 per cent to 14 per cent on the employer's contribution to NPS, to bring it at par with the level for central government employees.
National Pension System (NPS) deduction for state government employees has been increased from 10 per cent to 14 per cent for tier-1 accounts to bring it at par with central government employees, as per Budget 2022. The employees of state governments can now claim tax breaks accordingly.
“To provide equal treatment to central and state government employees, I propose to increase tax deduction limit from 10 per cent to 14 per cent on the employer's contribution to the NPS account of the state government employees as well. This will enhance their social security benefits,” said Finance Minister Nirmala Sitharaman during her Budget speech.
“It’s a good thing because it helps government employees meet their retirement goals as it (NPS) means forced savings and an opportunity for growing it in a balanced manner both in terms of debt and equity,” says Lovaii Navlakhi, managing director and CEO, IMMPL, a financial advisory firm.
Any government employee with investment up to Rs 1.5 lakh in NPS in a financial year can avail tax benefit under Section 80CCD (1) of the Income Tax Act, 1961. This deduction can be availed under the overall limit of Rs 1.5 lakh allowed under Section 80C. But there is an additional tax deduction of Rs50,000 under Section 80CCD (1B), over and above the 80C Rs1.5 lakh limit. So, in all, one can avail tax benefit of Rs2 lakh.
Private Sector Left Out
“There is no additional tax benefit for private sector employees;, they can only avail 10 per cent tax benefit like before. This 14 per cent NPS deduction is only there for the state and central government employee,” says Sumit Shukla, CEO, HDFC Pension, which is one of the NPS pension fund managers.
Employees of private sectors have expressed their disappointment at being left out on Twitter.
NPS Assets Increase
NPS has been a preferred choice of investment scheme for retirement. In 2019, the central government had increased the share of employers’ contribution for central government NPS subscribers from 10 per cent to 14 per cent. Later, this was extended for employees of Central Autonomous Bodies (CABs) as well.
As per the data of the Economic Survey 2021-22, released on January 2022, assets under management (AUM) of NPS and Atal Pension Yojana surged 35 per cent year-on-year as of September 30 to touch Rs6.67 lakh crore. On the same day last year, the combined AUM stood at Rs. 4.94 lakh crore.
The Budget announcement is for tier-1 accounts in NPS. These accounts have a lock-in period which is till the subscriber reaches 60 years of age. Partial withdrawals are allowed, but conditions apply. Tier-2 accounts are for voluntary savings with flexible withdrawals, but contributions are not eligible for tax deduction.