National Pension Scheme (NPS) is a government-sponsored pension scheme. The scheme allows subscribers to contribute regularly in a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income after retirement.
If your annual basic salary is Rs 5 lakh and you are in the 30% tax bracket, you can save a neat Rs 15,045 every year even after exhausting the Rs 1 lakh exemption limit under Section 80C of the Income Tax Act.
All you have to do is to ask your employer to make minor adjustments in your salary structure.
The government gives special tax exemption for contribution towards the National Pension System (NPS) by employers on behalf of employees under the corporate model.
Under this, both employee and employer's contributions are eligible for income tax deduction.
While the employee contribution up to 10% of basic plus dearness allowance, or DA, is eligible for deduction under Section 80CCD within the Rs 1 lakh limit, the employer's contribution up to 10% of basic plus DA is eligible for deduction under Section 80CCE over and above the Rs 1 lakh limit.
Even the employer can claim tax benefit for its contribution by showing it as business expense in the profit and loss account.
All your employer has to do is register and contribute to your NPS investments. It must already be doing so by contributing to the Employee Provident Fund, a mandatory retirement savings option that companies have to offer their employees.
The NPS contribution will be in addition to your Employee Provident Fund, or EPF, investments. Does this mean your employer will take have to the extra burden? No. It can simply deduct the contribution from your salary. You gain by funnelling a big part of your salary into your retirement fund and saving tax.
WHO CAN BENEFIT?
Other than central and state government employees, mandated to make contribution to NPS, those working in entities registered under the Companies Act and cooperative Acts, registered partnership firms, proprietorship concerns, trusts and societies can avail of the additional tax exemption under this model.
The tax benefit on employer's contribution was introduced on December 2011 after the announcement in the Union Budget early that year.
Corporate houses willing to join NPS can do so by tying up with one of the PFRDA-approved points of presence, which facilitate account opening and act as an interface between the subscriber and NPS intermediaries such as record-keeping agencies.