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This NPS tax benefit can still be claimed under the new income tax rates

This NPS tax benefit can still be claimed under the new income tax rates

Tuesday, February 18, 2020 IST

• If their organizations allow, employees can opt to restructure their salary structure to opt for this tax deduction

• If you opt for the new tax income tax regime you won't be eligible to claim ₹50,000 deduction under Section 80CCD (1B) that is available under the existing tax regime

If you want to switch to the lower income tax rates and new slabs announced in Budget for financial year 2020-21, you have to forego most of the deductions including the popular Section 80C. But some deductions, including employer contribution on account of employee in notified pension scheme (NPS) under Section 80CCD (2), can still be availed if you opt for the new income tax regime.

"Deduction under sub-section (2) of Section 80CCD (employer contribution on account of employee in notified pension scheme) and Section 80JJAA (for new employment) can be claimed," says the Finance Bill.

In case your employer is contributing towards your NPS account, which is mandatory for government employees (except Armed Forces) who joined services after 1st January 2004 and voluntary in case of those working in private sector, a deduction of up to 10% of salary (basic + DA) irrespective of any limit qualifies for income tax deduction under Section 80 CCD(2). For central government employees, the limit is 14% of the salary of central government employees. If their organizations allow, employees can opt to restructure their salary structure to opt for this tax deduction.

In the new income tax regime as announced in Budget 2020, there are seven tax slabs—zero tax for income up to ₹2.5 lakh; 5% for income between ₹2.5 lakh and up to ₹5 lakh; 10% for income between ₹5 lakh and up to ₹7.5 lakh; 15% for income between ₹7.5 lakh and up to ₹10 lakh; 20% for income between ₹10 lakh and up to ₹12.5 lakh; 25% for income between ₹12.5 lakh and up to ₹15 lakh; 30% for income above ₹15 lakh.

Note that if you opt for the new tax regime you won't be eligible to claim ₹50,000 deduction under Section 80CCD (1B) for investment in Tier 1 account of NPS that was available under the existing tax regime.

However, in another income tax rule change proposed in Budget 2020, the employer's contribution exceeding ₹7.5 lakh in a year towards NPS, superannuation fund and EPF will be taxable in the hands of the employee.

Currently, under the existing income tax laws, the contribution by the employer to the account of an employee in a recognized provident fund exceeding 12% of salary is taxable. Further, the amount of any contribution to an approved superannuation fund by the employer exceeding ₹1.5 lakh is treated as perquisite in the hands of the employee. Similarly, the employee is allowed a deduction under National Pension Scheme (NPS) for the 14% of the salary contributed by the central government and 10% by any other employer.