Maximising Employer NPS Contributions: How to Leverage the 14% Limit Under New Tax Regime
In a move that may significantly impact retirement planning strategies for salaried individuals, the government has made provisions for a higher tax-exempt employer contribution to the National Pension System (NPS). Under the new tax regime, employers can contribute up to 14% of the basic salary plus dearness allowance (DA) towards NPS for central government employees, with private sector employees also eligible to benefit from this rule—provided their employers choose to opt in.
While this provision was announced in the Union Budget 2020, it remains underutilised in the private sector due to a lack of awareness and strategic adoption. With the recent emphasis on financial discipline and future-ready retirement planning, understanding how to maximise this opportunity could yield substantial long-term employee benefits.
What is the 14% Employer Contribution Rule?
To begin with, under Section 80CCD(2) of the Income Tax Act, employer contributions to NPS are tax-exempt up to a specific limit. For employees under the old tax regime, this cap remains at 10% of basic + DA, while the new tax regime has extended this limit to 14%—a benefit that central government employees already enjoy.
In recent circulars, it was clarified that private-sector employers are also allowed to contribute up to 14%, and such contributions would remain fully tax-exempt for the employee as long as they opt for the new regime. This opens up an opportunity for both employers and employees to restructure compensation packages more efficiently.
Main Benefits of the 14% Employer Contribution Rule
Before diving into how to maximise this rule, here’s a snapshot of the key advantages:
- Higher Retirement Corpus: The 14% incremental benefit can result in significant corpus growth over the years.
- Zero Tax on Employer’s Contribution (up to ₹7.5 lakh annually): Contributions up to this limit are entirely exempt.
- EET Tax Benefit: NPS follows the Exempt-Exempt-Tax (EET) model, meaning withdrawals at retirement are only partially taxable.
- Improved In-Hand Salary through Smart Structuring: Contributions are not taxable, allowing employees to reduce tax liability.
How Employees Can Leverage the 14% Employer Contribution Rule
Here are seven strategic points to help salaried individuals understand how to make the most of this provision:
Opt for the New Tax Regime with Proper Planning
Many employees stick to the old regime out of habit or lack of information. But if your employer is willing to increase the NPS contribution from 10% to 14%, it may make sense to switch to the new regime, especially if:
- Your income is above ₹15–20 lakh per annum
- You don’t have many tax-saving investments or housing loans
- You are interested in long-term retirement planning.
Work with HR/Finance to Restructure Your CTC
Most employers are open to salary restructuring, especially when it brings tax savings for the employee. Employees can:
- Request the employer to divert some of the existing allowance or bonus structure toward NPS.
- Ask for a formal inclusion of 14% NPS contribution in their salary components.
- Ensure the restructuring is documented and reflected in the salary slip.
Maximise the ₹7.5 Lakh Exemption Window.
As per current tax laws, employer contributions towards NPS, EPF, and superannuation fund combined are exempt up to ₹7.5 lakh per annum. Employees earning higher packages should calculate the following:
- How much is currently going towards EPF and superannuation
- What is the remaining headroom for NPS within the ₹7.5 lakh cap?
- Ensure the 14% NPS contribution doesn’t breach this limit to maintain full tax benefits.
Use NPS Calculator to Forecast Long-Term Gains
Employees can use online NPS calculators to:
- Visualise how much a 14% contribution adds to the retirement fund
- Estimate maturity amount and tax implications at the age of 60
- Plan withdrawals and annuity purchases more efficiently
- This helps in better decision-making and long-term planning.
Ensure Correct Documentation for Claiming Benefits
Tax benefits under Section 80CCD(2) are available only if the employer contributes directly to the NPS Tier-I account. Ensure that:
- The employer contributes to your PRAN (Permanent Retirement Account Number)
- The contribution is reflected in the Form 16 and the 26AS statement
- You retain monthly salary slips and proof of NPS contribution for your records.
Conclusion
The changing demographics and increasing life expectancy in India warrant more prudent retirement planning. The tax-exempt corpus-building opportunity under the 14% rule is currently underutilised. Employees should push for negotiations to optimise their in-hand salaries and long-term financial independence.
FAQs
What is the 14% employer NPS contribution rule?
The 14% employer NPS contribution rule allows private sector employers to make tax-exempt contributions of up to 14% of an employee's basic salary and dearness allowance towards their NPS account under the new tax regime.
Who can avail of the 14% employer NPS contribution?
The 14% employer contribution can be availed by central government employees under the old tax regime and private sector employees under the new tax regime, provided the employer opts to contribute up to this limit.
How does the 14% contribution benefit employees?
The higher contribution results in faster retirement corpus growth, zero tax on contributions up to ₹7.5 lakh per annum, and partial tax on withdrawals under the EET model - making it beneficial for long-term planning.
Should employees switch to the new tax regime to avail of this?
Yes, employees must switch to the new tax regime if their employer is willing to increase NPS contribution from 10% to 14%. It suits those with incomes above ₹15-20 lakh and limited existing investments.
How can employees restructure their CTC for this?
Employees can request the employer to divert some existing allowances or bonuses towards the 14% NPS contribution and have it formally included in their salary structure and documented.
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