In the budget presented for the next financial year (Budget 2022), changes have been announced in the rules of tax deduction on contribution to the National Pension Scheme (NPS). Finance Minister Nirmala Sitharaman has said that the tax deduction limit on contribution to NPS is being increased from 10 per cent to 14 per cent for state government employees. What does it mean, how much will the state government employees benefit from it, what are the rules for private sector employees? Let us try to know the answers to these questions.
At present, central government employees can claim tax deduction of up to 14 per cent on contribution to NPS. Before the announcement in the budget, state government employees could claim up to 10 percent tax deduction on contribution to NPS. In this way, there were different rules for central government and state government employees. The Finance Minister has eliminated this difference in the rule in this budget. However, private sector employees can still claim tax deduction up to 10 per cent on contribution to NPS. This means that the rules for deduction of tax on contribution to NPS are still not completely uniform. Experts say that the Finance Minister should have increased the limit of tax deduction on contribution to NPS for private sector employees as well.
What are the rules for tax exemption on contribution to NPS?
Deduction of Rs 1.5 lakh is allowed under section 80CCD on investment in Tier 1 account of NPS. This is for both government and private sector employees. But, it is to be noted that the aggregate amount of deduction under section 80C, 80CCC (investment in pension plan offered by an insurance company) and section 80CCD(1) should not exceed Rs 1.5 lakh in a financial year .
Apart from this, a separate deduction of Rs 50,000 is allowed under section 80CCD (1B) on contributions to NPS Tier 1 account. It is to be noted that if an NPS subscriber opts for the new regime of income tax, he will not get a separate deduction of Rs 50,000 under 80CCD(1B) or deduction of Rs 1.5 lakh under section 80CCD(1).
Central government employees will be allowed deduction of up to 14 per cent of salary (Basic + DA) if your employer contributes to your NPS account. They get this facility under section 80CCD(2). Now this limit has increased to 14 percent for state government employees also. But, the limit for private sector employees still remains 10 percent.
Tier 1 account is mandatory under NPS rules, while Tier 2 account is voluntary. Tier 2 account is like a savings account, in which you can keep your surplus money. Then, you can withdraw money from it if needed. That’s why it has been made optional. Central government employees get tax benefits on contribution to Tier 2 account of NPS under section 80C(2)(XXV), section 80C. But, there is a condition of lock-in period of 3 years for this.
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