Central/ State Governments can contribute upto the limit of 14% as Employer’s NPS contribution. However, when we talk about deduction under IT S. 80CCD(2), there is a differential treatment for the employees of respective Governments. In the case of State Government employees the deduction is capped or restricted at 10%, whereas deduction upto 14% is allowed in the case of Central Government employees. To maintain parity between Central and State Government employees, proposed amendment in IT S. 80CCD(2) provides for deduction of upto 14% contribution to National Pension System (NPS) in the case of subscribers who are State government employees, at par with Central Govt. employees, vide Clause 20 of the Finance Bill 2022 (budget 2022-23):
1. Under the existing provisions of the Income Tax Act, any contribution by the Central Government or any other employer to the account referred to in section 80CCD of the Act (NPS account), shall be allowed as a deduction to the assesses in the computation of his total income, if it does not exceed 14% of his salary where such contribution is made by the Central Government. This limit is presently 10% of his salary where such contribution is made by any other employer. The State Governments were given an option to raise the contribution to 14% w.e.f 01.04.2019 on their own volition, based on their own internal approvals and notifications, without seeking the approval of the Pension Fund Regulatory and Development Authority of India (PFRDAI).
2. In order to ensure that the State Government employees also get full deduction of the enhanced contribution by the State Government, it is proposed to increase the limit of deduction under section 80CCD of the Act from the existing ten per cent to fourteen per cent in respect of contribution made by the State Government to the account of its employee.
3. This amendment will take effect retrospectively from 1st April, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years; so as to ensure no additional tax liability arises on any contribution made in excess of 10% during such time.
Summary of Direct/ Indirect Tax Proposals of Union Budget 2022-23