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NPS Gets a Tax Saving Fillip in Budget2011


The Central Government pays 10% to the National Pension Scheme (NPS) for all its employees, with employees putting in another 10%. Even private employers may do so.

Your own contribution had the exemption upto Rs. 1 lakh, an overall limit for all such tax saving avenues such as insurance payments, children’s education fees, ELSS mutual fund investments ad so on. Earlier even the employer’s payments came into the same deduction, and employers weren’t allowed to reduce that amount as a business expense.

Now the employer’s payment does not come into the 1 lakh limit, and they can expense it. But if it’s not taxed to your employer (i.e. the money is allowed as an expense), does that mean it will be taxed as a perquisite? We don’t know – the bill doesn’t say!

Two cases then: one, the employer’s contribution is taxed in your hands as a perk. What’s the point, then? You pay taxes today on money you can’t touch till you retire, and when you get that money you pay taxes on it again.

Second, that such employer’s contribution is not taxed in your hands. That makes sense, and brings it on par with other superannuation fund payments (like pension schemes). This is cool, but remember any withdrawal from a pension scheme is taxed, so all you’re doing is deferring the tax. Nevertheless, policy clarity would be welcome.


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