The new tax regime has made income tax filing easier, but there’s one complaint many salaried employees share, i.e., it offers very few deductions. If you’ve been wondering whether there’s still a , the answer could lie in your salary structure rather than a new investment.
A growing number of tax experts say employees should look at one benefit that often goes unnoticed: the employer’s contribution to the National Pension System (NPS). It is one of the few tax-saving provisions that continues under the and could help you save tax while building a retirement corpus.
Unlike deductions under the old tax regime, the tax benefit on an employer’s contribution to NPS has been retained.
CA (Dr) Suresh Surana says this makes it one of the most valuable tax-saving tools for salaried individuals.
“Under the new tax regime, the employer’s contribution to the National Pension System (NPS) continues to be one of the most significant tax benefits available to salaried individuals. It offers the dual advantage of tax optimisation and long-term retirement savings,” he said.
The employer’s contribution is first treated as part of the employee’s salary and then a deduction is allowed under the Income Tax Act, subject to the prescribed conditions.
Earlier, government employees could claim a deduction on employer NPS contributions of up to 14% of salary, while private sector employees were generally limited to 10%.
That gap has now narrowed under the new tax regime.
“The benefit has effectively been extended to allow up to 14% of salary as a deductible employer contribution even for non-government employees, creating parity across sectors,” Surana explained.
This means many private sector employees can now enjoy a higher tax benefit than before if their employer offers Corporate NPS as part of the salary package.
Yes, but it depends on your company’s compensation policy.
Many employers offer flexible salary structures that allow employees to choose how their cost-to-company (CTC) is divided. If your company offers Corporate NPS, you may request a higher employer contribution instead of receiving the entire amount as cash salary.
“Subject to company policies, employees can request a restructuring of their salary to include a higher employer contribution to NPS, making it a viable tool for both tax planning and retirement wealth creation,” Surana said.
However, employees should remember that increasing the employer’s NPS contribution may reduce their monthly take-home salary because more money is diverted towards retirement savings.
The benefit is available to all eligible salaried employees, but those with because the deduction is linked to basic salary and dearness allowance.
According to Surana, “Senior professionals, executives and individuals in higher tax brackets tend to derive the greatest advantage.”
At the same time, he believes middle-income earners can also benefit significantly if their employers include Corporate NPS as part of the salary package.
While employer NPS contributions are tax-efficient, they are not unlimited.
The combined employer contribution to NPS, Employees’ Provident Fund (EPF) and the superannuation fund is tax-free only up to Rs 7.5 lakh in a financial year. Any amount above this limit becomes taxable.
Surana also cautions employees against common mistakes while claiming the benefit.
“The deduction is often calculated incorrectly using gross salary or CTC instead of basic salary and dearness allowance. Employees should also ensure employer contributions are reported correctly in their income tax returns to avoid errors or double taxation,” he said.
As the new tax regime becomes the default option, experts expect more companies to consider Corporate NPS as part of their compensation structure.
According to Surana, larger organisations are better placed to adopt the benefit because it offers employees a tax-efficient retirement savings option.
However, he says adoption will depend on several factors, including payroll systems, administrative feasibility, employee preferences and whether employees are comfortable allocating a part of their CTC towards a long-term retirement product.
In other words, with most popular deductions no longer available under the new tax regime, employer NPS contribution has emerged as one of the few effective ways for salaried employees to lower their tax outgo while saving for retirement.
If your organisation already offers Corporate NPS, or is open to restructuring your salary, it may be worth discussing the option with your HR or payroll team. A simple change in your salary structure today could help you save tax while building a larger retirement corpus for the future.