• Notification Date: 03-03-2022
• Notification No: N/A

Amendments in the Income Tax Rule

Finance Minister Nirmala Sitharaman has announced that the state government employees will be able to enjoy the new benefits under the Income Tax rules. According to the FM, the state government employees are eligible to claim the benefit of 14% income tax under the National Pension System (NPS) that is made by the employer from the financial year 2022-23. She stated that the contributions made by the Central Government or other employees to the account that is referred to in section 80CCD of the Income-tax Act will be considered eligible for a deduction to the assessee in the calculation of his total income as per the new provisions of the Act.

The contribution made by the Central Government must be within 14 per cent of the total salary of the individual to be eligible for the benefit. The limit is presently 10 per cent of the total income for the other employees to make such a contribution. According to the Budget Memorandum, the state governments were provided with the option to increase the limit of the contribution to 14 per cent of the total income of the employee from 1 April 2019. The decision was entirely left to the state governments on their own internal approvals and notifications. The state governments were not required to seek approval from the Pension Fund Regulatory and Development Authority.

At present, this facility is only available for the Central Government employees who are making a contribution of up to 14 per cent to their NPS accounts.

NPS Tax Benefits

1) The tax benefits under the various sections of the Income Tax Act, 1961, the state government employees are eligible to claim the benefits on their contributions as well the employer’s contribution to the National Pension System account. The employees under the State Government may claim up to Rs. 1.5 lakh of tax exemption under Section 80CCD(1)  for the contributions made towards the NPS account. For the private sector employees, the tax benefits are limited to 10 per cent of the income.

2) If the employee makes a contribution to the NPS account under Section 80CCD (1b), they are eligible to claim an additional benefit up to Rs.50,000. This benefit is available for those employees who are investing in Tier 1 NPS accounts. Individuals contributing to Tier 2 NPS accounts are not eligible to claim the additional benefit.

Hence, the taxpayers are eligible to claim up to Rs.2 lakhs by making contributions to the NPS accounts in a financial year. The deductions will only be available for the employee if the individual chooses to pay income tax through the old income tax regime.

3) Salaried employees are eligible to claim tax exemption for the contribution of their employer to the NPS account. Under Section 80CCD (2) of the Income Tax Act, employees working under both the Central as well as the State Governments are eligible to claim up to 14 per cent of tax benefits on the contributions to the NPS accounts made by their employers.

It is to be noted that if the total contribution of the employer to the employee’s NPS account, along with the EPF and superannuation, exceeds the limit of Rs.7.5 lakhs, then the amount will be subjected to taxation in that financial year.