Finance Minister Nirmala Sitharaman has given great news to government employees. Finance Minister Sitharaman, in the budget presented on Monday, has proposed to raise the tax deduction limit on employers’ contribution to the National Pension System (NPS) account for state employees to 14 per cent now.
Currently, the tax deduction limit on NPS account for state employees is 10 percent. However, central government employees are already getting the benefit of the tax deduction limit of 14 per cent. This step of the government will work to bring equality between the employees of the state and central government. Also, this will lead to an increase in Social Security benefits.
State employees will now be able to claim 14% tax benefit
State government employees can now claim 14 per cent tax benefit on NPS contribution (contribution made by state governments to NPS account) on behalf of their employer from the financial year 2022-23 can claim. The tax benefit for private sector employees is currently only 10 per cent.
Tax benefits under three different sections
Investments in National Pension System (NPS) accounts are eligible for tax benefits under three different sections of the Income Tax Act, 1961. Deduction benefit is available under section 80CCD(1) on investments up to Rs 1.5 lakh in NPS in a financial year. This deduction comes within the overall limit of Rs 1.5 lakh under section 80C.
Additional deduction of Rs 50,000
The benefit of additional tax exemption is also available on NPS over the section 80C deduction. This additional deduction is available up to Rs 50,000 under section 80 CCD(1b). Any taxpayer can avail additional deduction of up to Rs 50,000 by investing in NPS Tier-1 accounts. In this way, any taxpayer can claim an overall tax benefit of Rs 2 lakh in a financial year by investing in NPS. This tax benefit of Rs 2 lakh will be available only if a person has adopted the old tax regime. Any contribution made by the employer above the limit of Rs 2 lakh will get the benefit of deduction under section 80 CCD(2) of the Income Tax Act, 1961.
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