July 15, 2024



Do NPS employer contributions consequence in “extra” tax price savings?

7 min read

In this post, we deal with a popular misconception about the contribution of NPS companies. Before we commence, we would like to stage out that your employer is most probable handling this contribution appropriately. The misconception is only among the staff members.The NPS employer’s contribution falls less than 80CCD(2) and is different from the 80C limit of Rs. 1.5 Lakhs.  This contribution is 10% of income (Essential + DA) (14% for condition and central govt staff members) and is deductible from taxable income up to 7.5 Lakh. Further than this, it is taxable for each slab. The identical tax-free of charge limit also applies to EPF.For the NPS worker contribution to be deducted from taxable income, it need to initial be added to the taxable cash flow!Suppose an personnel has a wage of Rs. 12 lakhs per year (to hold things simple, we believe this is just simple + DA). The NPS employer contribution on this is Rs. 1.2 lakh.The overall taxable cash flow now is Rs. 12 + Rs. 1.2 = Rs. 13.2. Now, you utilize portion 80CCD(2) and deduct the Rs. 1.2 the net taxable earnings is now Rs. 12 lakhs.You cannot deduct Rs. 1.2 lakhs from Rs. 12 lakhs and claim I have “additional tax benefits” from NPS employer contributions!   The NPS employer contribution is section of an employee’s salary and taxable earnings, which is why there is a tax deduction for it. So you insert the contribution to the wage and then use the deduction.So very first, you have “additional” taxable revenue from the employer contributions, and then you have an additional tax gain to nullify this! The actual advantage is a tax-free contribution to our NPS accounts. If we would like to watch these as a tax deduction, we will have to take pleasure in that we include them in the total income and then apply the deduction!This confusion does not come up with EPF employer contributions since they are not part of the wage and taxable revenue. This is why it does not subject irrespective of whether you abide by the new or previous tax routine. In the meantime, for NPS, the government has to specify that employer contributions are even now valid in the new routine.The right way to take pleasure in EPF or NPS contributions is to recognise that we get tax-no cost employer contributions in our account. This way, there is no confusion.We want to reiterate that your employer is most possible managing this contribution appropriately. 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