Employers’ contributions in NPS account to be exempt from tax

Taxes | admin | March 14, 2011 at 6:24 am

Are you upset by the budget because your tax saving has increased only by a meagre Rs2,060? What if we tell you that, in fact, it can go up by much more? Surprised? What you need to do is look at the bigger picture. In this case, it's your contribution to the National Pension System (NPS). The Budget has proposed that from 1 April 2012, employers' contributions to the NPS can be deducted as a business expense by them. And the icing on the cake is that such contributions will not be included in the Rs1 lakh limit exemptions that you can avail of under Section 80C.

"Presently, in case of an employee, a deduction up to Rs1 lakh is permitted in respect of specified expenses/ investments against his total income. This deduction includes the contribution made to the pension fund," says Milind S. Kothari, partner, MZS & Associates. However, this has been altered in the budget proposal. Contributions made by an employer to a pension scheme will now not be included under Section 80C. So, in your next salary increment, ask your employer to restructure your salary and include the NPS. Your employer will not have a problem acceding to your wish as according to the latest budget, 'employers are allowed deduction' on their contribution to the NPS.

Earlier, only the contributions towards a recognised provident fund, approved superannuation fund or gratuity fund was allowed as a business expense. "As pension funds are outside the purview of the aforesaid classified funds, the employer's contribution towards them was not allowed as a business deduction," says Kothari. As this has now been tweaked in the budget, employers might be willing to include the NPS in your pay package. However, employer's can claim deduction only on 10% of the salary (basic and dearness allowance). So, if your basic annual salary is Rs5 lakh, your employer will be willing to contribute up to Rs50,000 only. Restructuring your salary will also help reduce your tax outgo.

Source: Economic Times