What is NPS Employer Contribution?

The National Pension System (NPS) is a government-sponsored retirement savings scheme in India. Under this scheme, employers can contribute to their employees’ NPS accounts as part of their compensation package. The employer’s contribution is deposited into the employee’s NPS Tier-I account, which is the primary account used for retirement savings.

To Whom is NPS Employer Contribution Applicable?

Employees of Private Sector Companies: Employers in the private sector can include NPS contributions as part of their employee benefit plans.

Benefits of NPS Employer Contribution

1. Retirement Savings: Provides employees with a disciplined retirement savings mechanism.
2. Tax Benefits for Employees: Contributions made by the employer are tax-deductible under Section 80CCD(2) of the Income Tax Act.
3. Attractive Employee Benefit: Helps employers attract and retain talent by offering a long-term financial security plan.
4. Market-Linked Returns: Funds are invested in various asset classes (equity, government bonds, and corporate bonds), potentially generating higher returns over the long term.
5. The corporate contribution amounts to either upto 10% or 14% of the employee’s basic salary and dearness allowance (DA). This varies based on the tax regime, with upto 10% applicable under the old tax regime and upto 14% under the new tax regime.

Tax Exemption for NPS Employer Contribution

1. Under Section 80CCD(2): Employer contributions to NPS are eligible for tax deduction in the hands of the employee. This benefit is over and above the Rs. 1.5 lakh limit under Section 80C.
2. Exemption Limit: The maximum deduction allowed under Section 80CCD(2) is:
   • 10% of the salary (basic + DA) for private sector employees.
3. No Upper Monetary Limit: Unlike Section 80C, there is no fixed upper monetary limit for Section 80CCD(2).
4. PRAN number would be required for contribution to NPS scheme.

Key Points to Remember

• The employer’s contribution to NPS is entirely voluntary in the private sector but mandatory for government employees.
• Tax benefits under NPS are designed to encourage retirement savings.
• NPS contributions made by both employers and employees are managed by Pension Fund Managers (PFMs), ensuring professional fund management.
• Employees can monitor their NPS details by accessing the NPS portal (non ICICI customers) or iMobile App (for ICICI customers) and logging into their account using their PRAN.