NPS Employer Contribution: Limit & Tax Benefits

NPS also known as the National Pension System have been introduced by the government to encourage the habit of retirement savings in the future. In this scheme, both the employer and employee contribute to the NPS account to build a large corpus. This post talks about the NPS employer contribution importance, working, and related policies in detail.

How Does NPS Employer Contribution Works?

Employer contribution in NPS means the amount deposited by an employer into an employee's NPS account, often matching or complementing the employee's own contribution. This not only boosts the overall retirement savings but also offers tax benefits and helps in building a stronger financial foundation for the future.

How Employer Contribution Works in NPS?

When you open an NPS account with ICICI Bank, your employer can contribute up to 10% of your basic salary plus DA, subject to the NPS employer contribution limit of ₹7,50,000 per year. This additional contribution helps boost your retirement savings while ensuring easy management through ICICI Bank’s digital channels. These contributions qualify for tax benefits under Section 80CCD(2) under the Old Tax regime.

For example if the employer contributes 8% of your salary and this amounts to Rs. 50,000 annually, then the monthly contribution would be Rs. 50,000 divided by 12, which is approximately Rs. 4,167. This contribution enhances your savings. Employer contributions, particularly under Section 80CCD(2), offer tax advantages and boost your retirement savings.

How to Claim Tax Deductions on Both Employee and Employer’s Contributions to NPS

Contributing to NPS also means you are allowed to claim tax deductions on both your own contribution and the contribution made by your employer. These deductions fall under three sections of the Income Tax Act—Section 80CCD(1), 80CCD(1B), and 80CCD(2).

 Section 80CCD (1)

This section is for the employee’s contribution to NPS. You can claim up to 10% of your salary (basic + DA) as a deduction, within the overall limit of ₹1.5 lakh in a financial year. This is available under the old tax regime only.

Section 80CCD (1B)

This is an additional benefit for employees. Over and above the ₹1.5 lakh limit under Section 80C, you can claim another ₹50,000 for NPS contributions. This benefit is also available only under the old regime.

Section 80CCD (2)

This section covers the employer NPS contribution, and you can claim:

• Up to 10% of salary (basic + DA) under the old tax regime.

• Up to 14% of your salary if you're a government employee or under the new tax regime.

Old Tax Regime:

Deduction allowed up to 10% of salary (basic + DA).

New Tax Regime:

Deduction allowed up to 14% of salary (basic + DA).

Important: The combined employer contribution towards NPS, PF, and superannuation is tax-free only up to ₹7.5 lakh per year. Anything above this is taxed.

Employer Contributions in NPS: Impact on Your Investment Returns

While employers can make contributions to your NPS there are government imposed limits in place. For government employees, the employer's contribution to the NPS Tier I account can be up to 14% of the basic salary plus dearness allowance (DA). This ensures contributions are reasonable and align with salary structures.

Here are some key points to know to understand the impact of your employer’s contribution to NPS on investment returns: 

• Growth through Compounding

The funds in your NPS account including contributions from your employer are invested in instruments. The returns from these investments increase over time leading to a growth of your retirement savings. Compounding allows even small contributions to grow significantly over the years.

• Ensuring Retirement Security

The NPS aims to provide an income after you retire. By building a corpus throughout your working years you can secure stability and uphold your standard of living during retirement. The systematic approach to saving and investing ensures a source of income in your years. 

• Flexibility

NPS offers flexibility regarding investment options and contribution amounts. You can adjust your contributions and investment choices based on your objectives and risk tolerance. This flexibility ensures that the scheme suits your retirement planning needs. Allows you to customise your investments according to your preferences.

• Increased Investment

Your employer's contributions boost the amount in your NPS account increasing the potential for returns and a larger retirement fund. The extra funds from your employer play a role in bolstering your savings. 

• Compound Growth Boost

The contributions from both you and your employer benefit from compounding returns, which means that the more money you have invested the more you can gain from compounding over time. This compounding effect helps your retirement savings grow exponentially, maximising the returns on your investments.

• Tax Advantages

The tax perks linked to employer contributions enhance the returns on your investments as they are deducted from your taxable income, reducing your tax liability. This allows you to keep more of your investment gains thereby optimising the growth of your NPS fund. These NPS tax benefits serve as an added motivation to contribute to your NPS account and capitalise on its long term growth potential.

• Sustained Financial Growth

Through contributions from your employer there is an increase in your retirement savings, over time. This gradual accumulation can significantly boost your retirement fund in the run ensuring that you are well prepared for life after retirement.

Understanding Employer Contribution to NPS Variations

Employer contributions to NPS may vary depending on company rules and salary structures. Let's see how the employers contribute.

1. Percentage of Salary Contribution

Employers usually add a percentage of your basic pay to your NPS account. This fixed percentage, determined by the organisation, remains constant. Boosts your retirement savings predictably. For instance if your employer contributes 8% of your salary you can expect this addition to your NPS account.

2. Matching Contributions

In some instances employers match the contributions you make up to a limit. When you contribute a portion of your salary your employer matches that amount effectively doubling your contribution. This matching scheme encourages increased contributions to your NPS account and bolsters retirement savings.

3. Policy Disparities

The precise percentage or matching threshold may vary based on individual employer policies and industry norms.

It's important to have a grasp of your company's contribution policy in order to maximise the advantages of employer contributions. Reviewing the policy, with your HR department and discussing it thoroughly can help you optimise the benefits 

Conclusion

The National Pension System offers a flexible and organised approach to retirement planning, and employer contributions top up your savings. You may help ensure a secure and enjoyable future for yourself by taking full use of these benefits and staying informed about your employer's contribution obligations.

By taking advantage of employer contributions and understanding their impact on your investing performance, you can ensure a robust retirement fund and security in your later years.

FAQs Around NPS Employer Contribution

Is employer NPS contribution taxable for employees?

Employer contributions to NPS are tax-free up to ₹7.5 lakh annually (including PF and superannuation). Any amount beyond this limit becomes taxable as part of your income.

How can I check my employer's contribution to NPS?

You can log in to your NPS account on the CRA portal by NSDL or the app to check the transaction history. It clearly shows both employee and employer contributions separately.

What are the Limits on NPS Employee and Employer’s Contributions?

Employees can claim up to ₹2 lakh (Rs. 1.5 lakh under 80CCD(1) and ₹50,000 under 80CCD(1B)). Employers can contribute up to 10% of the employee's salary (basic + dearness allowance) for private sector employees and up to 14% for government employees.

How can an employer show NPS contributions under the P&L statement for tax purposes?

Employers can show NPS contributions under "Employee Benefit Expenses" in the Profit & Loss statement. You can claim tax deduction on these because they are treated as business expenses and can be eligible for deductions.