Employee Tax Benefits – NPS for Corporates

Tax benefits for Employees

Under NPS corporate model employee can deposit contribution directly or she can route the contribution through the employer she is working with. Both the contributions are eligible for tax deduction as shown below

Type of Contribution Tax Benefit Tax Treatment
Contribution deposited by Employee
  • Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C
  • Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961
  • Up to 40% of Corpus withdrawn in lump sum is exempt from tax
  • Balance amount invested in Annuity is also fully exempt from tax
  • Pension received out of investment in Annuity is treated as income and will be taxed appropriately
Contribution routed through the Employer
  • Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961. There is no cap in terms of absolute value.

Tax benefit u/s 80CCD (1B) and 80CCD (2) are over and above 1.5 lakhs limit u/s 80C.


Tax benefit for Employer

Corporate can avail of tax benefit u/s 36 (i) (IV) of Income Tax Act, 1961, on the contribution deposited by it.

How 80CCD (1B) and 80CCD (2) work?

Corporate needs to re-structure the salary of the employee as shown below:

Head Particulars Without NPS With NPS
Salary Basic (40% of Gross) 4,000,000 4,000,000
HRA (50% of Basic) 2,000,000 2,000,000
Flexi / Professional Allowance 3,327,600 2,927,600
Corporate Contribution – EPF 480,000 480,000
Corporate Contribution – Gratuity 192,400 192,400
Corporate Contribution - NPS (10% of Basic) 0 400,000
Gross Salary 10,000,000 10,000,000
 
Deductions 80CCE 1,50,000 1,50,000
Corporate Contribution – PF 480,000 480,000
Corporate Contribution – Gratuity 192,400 192,400
Corporate Contribution - NPS (80CCD (2)) 0 400,000
Individual Contribution to NPS (80CCD (1B)) 0 50,000
Gross Deductions 672,400 1,122,400
 
Taxable Salary 9,327,600 8,877,600
Change in Taxable Salary 450,000
Tax Saved @ 30% 135,000

How NPS Corporate model works?

In order to offer NPS to its employee corporate needs to register itself through a POP by submitting Corporate Registration Form and KYC documents as prescribed by the regulator. POP sends these documents to CRA which creates a Corporate Registration Number called CHO / CBO number.

Upon receiving the CHO / CBO number, Corporate can implement NPS in the system. POP helps create awareness about NPS to all the employees and organize NPS helpdesks where employees can deposit individual NPS registration form and KYC documents for NPS account opening.

Once the NPS account of employee is opened, Corporate can start deducting the contribution from monthly salary of the employee and sends the same to POP for further processing.