Are you looking for a smart way to minimise your tax burden while building a retirement corpus? If you have recently transitioned to the new tax regime, the tax-saving options may have reduced. With traditional deductions like Section 80C under the old tax regime out of the picture, is there a way to save tax on your salary?
The answer is yes; the corporate model of the National Pension System is working as a wealth-creator and tax-saving option for modern professionals. Understanding the NPS scheme is no longer an option, but it has become a financial requirement for corporate employees looking for the best retirement benefits.
Let us explore what Corporate NPS is, its features, and how you can use it for maximum tax advantages under the new tax regime.
What is Corporate NPS?
Corporate NPS is a long-term retirement savings scheme offered by an employer regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India. While any individual can open an NPS account, Corporate NPS allows organizations to co-contribute to their workforce's retirement funds.
Your employer deducts a specific amount directly from your monthly payroll and directs it into your Permanent Retirement Account Number (PRAN). It not only automates your wealth creation, but it also restructures your salary (Cost to Company, or CTC).
Key Features of the Corporate NPS Scheme
It is essential to understand why NPS for corporate employees is considered for retirement planning:
- Absolute Portability: PRAN belongs entirely to an individual, unlike company-specific pension trusts. They don’t need to close or transfer the account, if they switch jobs. Employees simply must inform their new employer of their existing PRAN, and they can continue the monthly contributions seamlessly.
- Market-Linked Wealth Creation: The NPS scheme does not trap the money in fixed buckets. Employees have the flexibility to allocate their funds across various asset classes, including Equity (up to 75%), Corporate Bonds, and Government Securities.
- Ultra-Low Cost: NPS offers some of the lowest fund management charges in the financial sector (often less than 0.09%). Lower administrative fees mean more money stays actively invested to compound over time.
- Dual Contribution Flexibility: While the employer contributes on the employee’s behalf through the corporate route, they are always free to make additional voluntary contributions into the same Tier-I account.
Tax Advantages of Corporate NPS Under the New Regime
"Does Corporate NPS still save tax if I am in the new tax regime?"
Yes, it is one of the only major tax deductions that survived the transition to the new tax regime.
When a corporate employee opts for the new tax regime, they lose the ability to claim the standard ₹1.5 lakh deduction under Section 80C, as well as the extra ₹50,000 retail NPS deduction under Section 80CCD(1B) of the old tax regime.
However, the government specifically retained the tax benefit for employer contributions under Section 80CCD(2).
Here is how the tax advantage works under the new rules:
- 14% Employer Deduction: NPS for corporate employees in the private sector enjoys the exact same benefit as government employees. Employer can contribute up to 14% of their Basic Salary plus Dearness Allowance (DA) into their NPS account under the New Tax Regime.
- Tax-Free Salary Restructuring: This 14% contribution is completely deductible from the employee’s taxable income. For example, if their Basic Salary is ₹10 lakh and their employer contributes ₹1.4 lakh (14%) to the employee’s NPS account, that ₹1.4 lakh is entirely removed from their taxable income calculation.
- The ₹7.5 Lakh Compliance Cap: The Income Tax Act mandates that the combined employer contribution to employee’s NPS, Employees' Provident Fund (EPF), and Superannuation fund must not exceed ₹7.5 lakh in a single financial year. Any employer contribution above this threshold is treated as applicable for the tax.
How Does Corporate NPS Work in Practice?
Corporate NPS is a streamlined process designed for operational efficiency. Here is the workflow:
- Corporate Registration: To adopt the corporate model of the National Pension System, the company registers with a Central Recordkeeping Agency (CRA).
- Employee Onboarding: The employee elects to opt into the Corporate NPS benefit. PRAN is generated digitally, if they do not have one. If they already have a standard retail PRAN, it is simply mapped to the new corporate entity.
- Salary Restructuring: The HR and payroll team restructures the employee's CTC. A portion of their pay (up to 14% of Basic + DA under new regime) is officially designated as the pre-tax employer's contribution to NPS.
- Monthly Deductions: The employer automatically deducts the specific amount directly to the CRA, which then invests it via the chosen Pension Fund Managers.
Why Companies Must Adopt NPS for Corporate
Employer contributions made toward the NPS scheme are treated as deductible business expenses under Section 36(1)(iv)(a) of the Income Tax Act. This directly reduces the corporation's overall tax liability.
Furthermore, offering NPS for corporate employees is a recruitment and retention strategy. Modern professionals are tax-conscious and an employer that actively helps its employees in the new tax regime and builds long-term wealth will help them attract top-tier talent.
Maturity and Exit Rules
What happens when an employee finally retires?
Employees are allowed to withdraw up to 80%, out of which 60% of their total accumulated corpus as a completely tax-free lump sum, upon reaching the age of 60 (or superannuation). The remaining 20% must be used to purchase an annuity plan. This annuity provides a guaranteed monthly pension.
Though, the purchase of the annuity is tax-exempt, the monthly pension that an employee receives thereafter will be taxed according to their applicable income slab in retirement.
To Conclude
Corporate NPS helps to switch into the new tax regime efficiently for gaining tax advantages. It is essential for salaried employees to protect their current income from heavy taxation while compounding their retirement wealth.
While the old tax regime allows 10% of their base salary plus dearness allowance to the employees, the new tax regime in Corporate NPS ensures that employee’s future is secured, by allowing up 14% of their base salary plus dearness allowance from tax. If a company offers NPS for corporate employees, opting for it is one of the smartest financial decisions.
Take control of your retirement planning today and ensure you are maximizing hard-earned money while building a secure and wealthy future.
Frequently Asked Questions (FAQs)
Q1: Is Corporate NPS mandatory for all employees?
No, NPS for corporate employees is an entirely voluntary benefit.
Q2: Can I claim tax benefits under both Section 80C and Section 80CCD(2)?
Under the new tax regime, only the employer's contribution under Section 80CCD(2) is available for deduction.
Q3: What is the maximum limit my employer can contribute to save tax?
Under the new tax regime, your employer can contribute up to 14% of your Basic Salary plus Dearness Allowance (DA). However, the aggregate employer contribution across EPF, Superannuation, and NPS cannot exceed ₹7.5 lakh per financial year.
Q4: Can I choose my own Pension Fund Manager (PFM) in a Corporate NPS account?
Yes. Employees have the flexibility to choose their preferred PFM and decide their asset allocation.
Q5: What happens to my Corporate NPS if I quit my job?
Your PRAN is fully portable across the country. When you join a new company, you can seamlessly attach the same PRAN to their corporate NPS structure.
