Can salaried individuals take NPS deduction in the new tax regime?

The taxpayers can choose between the new tax regime or the old tax regime from FY 2020-21. If you plan to choose the new tax regime, you can deduct the employer’s contribution from your NPS account.

The new tax regime has higher slabs and lower rates. But the new tax regime takes away around 70 exemptions and deductions allowed in the old tax regime. In other words, if the taxpayer opts for concessional rates of the new tax regime, he has to forgo all the common exemptions and deductions available under the old tax regime while calculating the taxable income. 

The deductions which are not allowed include deductions for life insurance and health insurance premium, contribution to employee’s provident fund account, principal repayment of home loan, investment in ELSS, public provident fund, etc. The taxpayers are also allowed to take a deduction for paying interest on housing loans under the existing regime. 

Apart from the above deductions, the salaried individuals can significantly reduce their tax liability by taking house rent allowance, leave travel allowance exemption, and a flat standard deduction of up to Rs 50,000 from their salary. If the taxpayers opt for a new tax regime, they cannot avail these common exemptions and deductions available in the old tax regime.

However, if you are evaluating which regime to choose, the taxpayers should not forget to avail a deduction for the employer’s contribution to the National Pensions System (NPS) account of the employee in the new tax regime. 

Where the employer contributes to the NPS account of the employee, Section 80CCD(2) allows the employee to take a deduction of the employer’s contribution from the taxable income. The government allows such deduction in both old and new tax regimes. 

The provision has no limit on the amount of contribution. However, the deduction is up to a maximum of 10 per cent of salary. The restriction is up to 14 per cent for Central Government employees. Here, salary means basic salary and dearness allowance. Generally, government employees receive a dearness allowance.

Let us understand how to calculate the eligible deduction under Section 80CCD(2) by an example. Suppose you are a non-government employee and your basic salary is Rs 9 lakh during the year. The total contribution by your employer in your NPS account is Rs 1,00,000 during the year. 

The contribution by the employer to your NPS account is Rs 1,00,000. Include the employer’s contribution in your gross total income. It is important to note that where an employer contributes to the employee’s NPS account, the contribution forms part of its total income (CTC). Now, take a deduction of the employer’s contribution from your gross total income. You can take a maximum deduction of Rs 90,000 out of Rs 1,00,000 contribution, as 10 per cent of basic salary is Rs 90,000. 

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in