National Pension System (NPS) is a scheme offered by the Government of India to boost the retirement savings of Indians. NPS option is available for individuals to save for their own retirement, and also for corporates to build a retirement fund for each of their employees.
Under the corporate model of NPS, an employer can add their own contribution to an employee's pension fund. NPS allows three types of contribution mix between the employee and the employer.
Investors in NPS need to choose an investment mix for their portfolio, which is distributed across equity, government bonds, etc. Corporates can choose a common investment mix for their entire organization, or give employees the option to set their own investment mix.
For a Tier I account of NPS, you need to contribute a minimum of ₹6,000 in a year. The minimum contribution for an individual is the same, irrespective of whether you are investing on your own or through your employer's corporate account.
Under section 80 CCD (I) of the income tax act, individual NPS contributions of up to 10 per cent of the salary are exempted from tax. This exemption is subject to an upper limit of ₹100,000.
When you contribute to NPS through your employer's corporate account, you can get additional tax deductions on NPS contributions made by your employer. Employer's NPS contributions of up to 10 per cent of the employee's salary are also exempted from tax; this exemption is in addition to the tax benefit on the employee's NPS contribution. This benefit is under section 80 CCD (II) of the income tax act.
Example : Suppose you earn an annual salary of ₹12,00,000. You contribute ₹70,000 in a year to NPS through your employer's corporate NPS account. You can get a tax benefit on this amount, and your taxable income will be reduced to ₹11,30,000 (₹12,00,000 - ₹70,000). Suppose in addition to your contribution, your employer makes a contribution of ₹70,000 to your NPS account. As per section 80 CCD (II), you can get a tax benefit on the additional amount as well. So, in total ₹140,000 will be deducted from your taxable income.
As you can see, if you invest in NPS through a corporate account, you can get a higher tax benefit than what is possible as an individual. If you want to increase your tax savings, it may be a good idea to request your employer to open a corporate NPS account.
If your employer doesn't want to take the burden of the additional cost, you can request to revise your pay structure. Under the revised pay structure, you can ask them to contribute a portion of your take-home pay to your NPS account. This way you can get additional tax savings without burdening the employer.
Use iCalculators India tax calculator to see how empoyer's NPS can impact your tax liability.