One of the advantages of salaried persons is retirement benefits through schemes like Employees’ Provident Fund (EPF), Superannuation Fund, National Pension System (NPS) etc. Contributions to such schemes not only help in building a retirement corpus, but are also tax-free till now.
While employees contribute 12 per cent of their basic salary and daily allowance (DA) per month to EPF, employers also make matching contributions. While the entire contribution of an employee goes to Provident Fund (PF), most of the employer’s contribution goes to Employees’ Pension Scheme (EPS) and Employees’ Deposit Linked Insurance (EDLI), while a small part of the contribution goes to PF.
So far, the entire amount of an employee’s contribution to a recognised EPF is eligible for tax deduction u/s 80C of the Income Tax Act even if the employee contributes more than 12 per cent of his/her basic salary + DA. On the other hand, employer’s matching contribution up to 12 per cent is tax free and any amount contributed by the employer in excess of 12 per cent becomes taxable.
Under a Superannuation Fund, only employers contribute 15 per cent of basic salary of respective employees to the fund. Contributions by employees are not mandatory, but an employee may make voluntary contribution and avail tax deductions u/s 80C on such contributions. Employers’ contributions up to Rs 1.5 lakh is tax free.
Originally launched to provide pension to government employees, who joined their services after December 31, 2003, employees contribute 10 per cent of basic salary and DA in NPS, while government contributes 14 per cent. Employee’s contribution up to Rs 1.5 lakh is eligible for tax deductions in a financial year, while the contributions made by government is tax free.
Apart from government, other employers were also allowed to adopt NPS as retirement benefit scheme from 2009. Both employees and employers in private sector contribute 10 per cent of basic salary + DA to NPS. Employees’ contributions up to Rs 1.5 lakh are eligible for tax deductions in a financial year, while employers’ contributions up to 10 per cent of employees’ salary (basic + DA) is tax free.
So, there is no upper monetary limit on contributions made by employers in EPS and NPS, while for Superannuation Funds, the limit is Rs 1.5 lakh in a financial year.
In the Union Budget 2020, a proposal has been made to put a cap of Rs 7.5 lakh in a financial year on combined contributions made to the three schemes (EPS, NPS and Superannuation Fund) by employer(s).
So, while an employee having Superannuation Fund as sole retirement benefit scheme would gain, highly paid employees having EPS and/or NPS as retirement benefit scheme(s) would suffer, as any contributions made by employer(s) over Rs 7.5 lakh in a financial year would now become taxable.
Moreover, any annual accretion by way of interest, dividend or any other amount of similar nature during the financial year will also be part of the Rs 7.5 lakh limit.
So, any contributions by employer(s) and return on pension scheme(s)/fund(s) in excess of Rs 7.5 lakh in a financial year will now become taxable for the highly-paid employees.
