Union Budget 2024: NPS contribution limit for employers in private sector raised to 14% from 10% of employee’s basic salary

Union Budget: Finance Minister Nirmala Sitharaman on Tuesday announced that the National Pension Scheme limit for employers in the private sector will raised from 14% to 10% of the employee's basic salary. 

"To improve social security benefits, deduction of expenditure by employers towards NPS is proposed to be increased from 10 to 14 per cent of the employee’s salary. Similarly, deduction of this expenditure up to 14 per cent of salary from the income of employees in private sector, public sector banks and undertakings, opting for the new tax regime, is proposed to be provided," the FM said in her Budget Speech.

An additional deduction equivalent to 4% of the basic salary is allocated for the employer’s contribution to the National Pension Scheme (NPS) for employees employed in private sector entities, public sector banks, and undertakings who have chosen the New Tax Regime (NTR). This would mean Rs 48,000 annual deduction for an employer.

"An additional deduction of 4% of basic salary is provided towards the employer’s contribution to the National Pension Scheme (NPS) for employees working with private sector and public sector banks and undertakings and have opted for the NTR. E.g. Any individual with a basic salary plus dearness allowance of INR 100,000 per month may now be eligible to claim an additional deduction of INR 4,000 per month / INR 48,000 per annum for employer’s contribution to NPS and save annual tax of Rs 14,976," said Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services, BDO India.

As of now, the existing rules offer to benefit the employee, the employer's Net Promoter Score (NPS) contribution, capped at 10% of the salary (Basic + Dearness Allowance), is eligible for deduction from taxable income, up to a limit of 7.5 Lakh. Increasing the deductible amount from 10% to 14% would result in the taxpayer having a higher take-home pay, as they would be liable for a reduced amount of income tax.

Before this, Pension Fund Regulatory and Development Authority (PFRDA) chairman Deepak Mohanty had said in January that employers’ NPS contribution of up to 12% of employees’ basic salary should be exempt from tax. 
He had said: “We have made a case for bringing the tax benefits on employers’ NPS contribution at par with the employees’ provident fund (EPF) contribution limit of 12 percent.”

Under the NPS, companies or employers have the opportunity to avail tax benefits by making contributions towards their employees' NPS accounts. The employer's contribution, up to a limit of 10 percent of the salary (14 percent for government employees), which includes the basic salary and dearness allowance, is eligible for deduction as a 'Business Expense' from the corporate entity's profit and loss (P&L) account. This provision is outlined in section 36(1)(iv)(a) of the Income Tax Act, 1961.

Employees can claim tax breaks on their employers’ contribution of up to 10 percent of their wages under section 80CCD(2), irrespective of the tax regime they choose. 

The taxpayers under Old Tax Regime get an additional set of tax deductions under section 80CCD(1) on own NPS contribution of up to 10 percent of salary (subject to overall 80C limit of Rs 1.5 lakh) and additional deduction of up to Rs 50,000 under section 80CCD(1B).