A penny saved is a penny earned, but a penny wisely invested is a future secured.
1. Introduction: NPS as a Tax-Saving Tool under the New Tax Regime
With the introduction of the New Tax Regime in Financial Year 2020-21, the government provided taxpayers with an alternative tax structure. This regime offers lower tax rates but eliminates most exemptions and deductions available under the Old Regime. Taxpayers can choose between the Old Tax Regime, which allows deductions like HRA, LTA, and 80C, or the New Regime, which simplifies taxation but with fewer options for tax-saving deductions.
As the New Tax Regime continues for the Assessment Year 2025-26 (FY 2024-25), employees and employers can utilize various methods to maximize tax savings. Among the tax-saving tools, the National Pension Scheme (NPS) stands out as a highly advantageous option. It offers both tax deductions and long-term retirement savings benefits.
Employers can leverage NPS contributions to help employees save on taxes while offering a long-term financial benefit. Below, we’ll explore how employers can contribute to NPS and how salary restructuring can maximize tax savings under the New Tax Regime.
2. NPS Tax Benefits under the New Regime: A Breakdown
The National Pension Scheme (NPS) is a government-backed retirement savings scheme that offers significant tax benefits under both the Old and New Regimes. Here’s a quick overview of the tax benefits available under the NPS:
A. Employee Contributions: Section 80CCD(1B)
Under the New Tax Regime, employees can make voluntary contributions to the NPS and claim a deduction of up to ₹50,000 under Section 80CCD(1B). This amount is over and above the ₹1.5 lakh limit for Section 80C deductions.
This deduction is not available under the Old Regime if an employee opts for the New Regime tax slabs.
B. Employer Contributions: Section 80CCD(2)
Employers can contribute directly to the employee’s NPS account under Section 80CCD(2), with no upper limit. However, it is capped at 10% of the employee's basic salary + dearness allowance (DA).
Employer contributions to NPS are tax-free for the employee and can be claimed as a deduction by the employer, thus reducing the taxable income of both parties.
3. How Employers Can Facilitate NPS Contributions through Salary Structuring
Employers have several ways to incorporate NPS contributions into the salary structure, benefiting both the employer and the employee. Below are the main ways to structure salary components for tax savings:
A. Employer’s Direct Contribution to NPS (Section 80CCD(2))
Employers can directly contribute to the NPS on behalf of employees. The employer can contribute up to 10% of the employee's basic salary + DA, and this contribution is tax-exempt for the employee.
Tax Benefit for Employer: The employer’s contribution is tax-deductible, thus reducing the employer's taxable income.
Example:
Suppose an employee has a basic salary of ₹12,00,000. The employer can contribute 10% of this (₹1,20,000) to the employee’s NPS account.
This ₹1,20,000 will be tax-free for the employee and can be claimed as a deduction under Section 80CCD(2).
B. Employee’s Contribution through Salary Restructuring (Section 80CCD(1B))
Employers can restructure the salary to include NPS contributions for tax-saving purposes. This can be a strategic method for employees to make voluntary contributions to the NPS while ensuring they benefit from tax deductions.
Salary Components: Employers can restructure the basic salary or fixed monthly salary to allow the employee to contribute to the NPS.
Employee Contributions: Employees can contribute directly from their salary under Section 80CCD(1B). They can claim a deduction of up to ₹50,000 for the contributions they make to NPS, reducing their taxable income.
Example:
An employee’s basic salary is ₹6,00,000. The employer allows the employee to contribute ₹50,000 to the NPS from their salary.
This ₹50,000 can be claimed under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C.
C. Combination of Employer and Employee Contributions
Employers can also contribute to the NPS while allowing the employee to make their own contribution. This combination can be structured so that both parties receive maximum tax benefits.
Example:
Suppose an employee has a basic salary of ₹8,00,000.
The employer can contribute 10% of the basic salary (₹80,000) to NPS under Section 80CCD(2).
The employee can also contribute ₹50,000 under Section 80CCD(1B).
This brings the total contribution to ₹1,30,000, all of which will help reduce the employee’s taxable income.
4. Benefits of NPS for Both Employers and Employees
A. Benefits for Employers
Tax Deduction for Employer: Employer contributions to NPS are deductible from the company’s taxable income under Section 80CCD(2).
Attracts & Retains Talent: Offering NPS contributions can make the company’s compensation package more attractive, especially for employees seeking long-term retirement planning.
Reduced Payroll Taxes: By contributing to NPS, employers reduce their own payroll tax liabilities.
B. Benefits for Employees
Tax Savings: Employees benefit from tax deductions on both voluntary contributions under Section 80CCD(1B) and employer contributions under Section 80CCD(2).
Retirement Corpus: Employees accumulate a pension corpus that they can access post-retirement, offering long-term financial security.
Portability: The NPS account is portable, meaning employees can transfer the corpus from one employer to another, ensuring continuity in their retirement savings.
5. Strategic Tips for Employers and Employees
A. For Employers:
Employers should design their salary structure in a way that includes NPS contributions to maximize both tax savings and retirement benefits.
The employer’s contribution should be carefully calculated to stay within the 10% limit of the employee's basic salary + DA.
Employers can offer the option of contributing more to NPS on behalf of the employee, potentially enhancing the retention factor.
B. For Employees:
Employees should actively opt-in for voluntary NPS contributions under Section 80CCD(1B), as it offers a significant opportunity for additional tax savings.
Regular contributions to the NPS not only save taxes but also build a substantial retirement corpus, providing security in the post-retirement years.
6. Conclusion: Maximizing Tax Savings through NPS
The National Pension Scheme (NPS) is one of the most effective tools for both tax savings and retirement planning. Whether through employer contributions or salary restructuring, employees and employers can take full advantage of the tax benefits provided by the government.
Employers who incorporate NPS contributions as part of their salary structure offer a valuable benefit to employees, helping them save on taxes now while securing their future retirement. This approach not only enhances employee satisfaction but also helps employers lower their tax liabilities.
By strategically using NPS, both employers and employees can benefit from long-term financial planning while simultaneously enjoying immediate tax benefits.
"The future belongs to those who plan for it today."
