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While the employer’s contribution to the National Pension Scheme (NPS) is eligible for deduction under both the Old Tax Regime and New Tax Regime, questions arise regarding its treatment under Section 17(2)(vii) of the Income-tax Act. This provision raises doubts among employees regarding the eligibility to claim deductions under Section 80CCD(2), particularly when the aggregate of employer contributions to the NPS, recognized provident fund, and approved superannuation funds does not exceed Rs 7,50,000.

Let's go through the relevant provisions to provide clarity with respect to the above issue.

(1) Section 17(1)(viii)

As per the above clause of Section 17, "salary’ includes the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under the National Pension Scheme (NPS).

(2) Section 17(2)(vii)

As per above clause of section 17, "Perquisite” include- the amount or aggregate of amounts of any contribution made to the account of the assessee by the employer—

• in a recognised provident fund;
• in the National Pension Scheme (NPS); and
• in an approved superannuation fund,

to the extent that it exceeded seven lakh and fifty thousand rupees in the previous year.

(3)Section 80CCD(2)

As per sub-section (2) of section 80CCD, in the case of an employee , any contribution to his account in the National Pension Scheme made by the employer is allowed a deduction in the computation of his total income, to the extent of

• 14% of his salary in the previous year, where he is employee of the Central or State Government;
• 10% of his salary in the previous year, where he is employee of any other employer ( other than the Central or State Government),

The term 'salary' for this purpose includes basic salary and dearness allowance (if applicable).

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Example-

Ramesh is an employee of a private sector company. His employer contributed ₹1,00,000/- to his National Pension Scheme (NPS) account, which is less than 10% of his salary (basic pay plus dearness allowance). Can Ramesh claim deduction under Section 80CCD(2) of Rs 1,00,000/- without including the employer’s contribution of NPS in his gross salary?

No, he cannot claim the deduction under Section 80CCD(2) of ₹1,00,000/- without including the employer's contribution to the NPS in his gross salary.

• As per Section 17(1)(viii) of the Income-tax Act, the contribution made by the employer to the NPS account is considered part of the employee's salary. Therefore, the employer's contribution of ₹1,00,000 to the NPS account must be included in the employee's gross salary.
• As per Section 17(2)(vii), contributions by the employer to the NPS (along with contributions to a recognized provident fund and an approved superannuation fund) are considered perquisites only to the extent that the total contributions exceed ₹7,50,000/- in a financial year. Since the employer's contribution here is ₹1,00,000/- and does not exceed this threshold, it is not treated as a taxable perquisite. However, this section does not alter the fact that the contribution is included in the gross salary.
• As per Section 80CCD(2), Ramesh can claim a deduction for the employer’s contribution to the NPS up to 10% of his salary.

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Deduction Calculation:

Assume Ramesh's salary (basic salary + dearness allowance) is ₹10,00,000.

• Employer's contribution to NPS: ₹1,00,000
• Gross salary, including employer's contribution: ₹10,00,000 + ₹1,00,000 = ₹11,00,000

Ramesh can claim a deduction under Section 80CCD(2) = ₹1,00,000 (since it is within 10% of ₹10,00,000) but he must include the employer's contribution of ₹1,00,000 in his gross salary first.

Conclusion

Employees can claim a deduction under Section 80CCD(2) for their employer’s contributions to the National Pension Scheme (NPS). However, this contribution must be included in their gross salary as per Section 17(1)(viii) of the Income-tax Act. While the contribution itself is not considered a taxable perquisite unless it exceeds the aggregate limit of Rs 7,50,000 along with contributions to recognized provident funds and approved superannuation funds (as outlined in Section 17(2)(vii)), it still forms part of the total salary. Thus, understanding the interplay between these provisions is crucial for accurately calculating taxable income and eligible deductions. Click here to book your FREE tax assessment call 

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Disclaimer:The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.