In the Union Budget 2020, FM Nirmala Sitharaman announced a new upper limit of the tax-free employers’ contribution to retirement funds. According to the new limit, the contribution of the employer towards the National Pension Scheme (NPS), superannuation fund, and recognized provident fund will be capped at Rs 7.5 lakh per annum per employee, with effect from April 1, 2020.
Employer contribution above Rs 7.5 lakh per year will be considered as a perquisite of the employee and taxed accordingly. Additionally, Budget 2020 also proposed that any accretion in the form of interest, dividend, or other amounts similar in nature listed in the previous years to the balance at the credit of the fund can be treated as perquisite with respect to the contribution of the employer. This amount is required to be added in the gross income.
As this provision will come into effect from April 1, 2020, this limit will be applicable for calculating tax for assessment year 2021-22 and the following years. According to current norms, contribution from the employer to recognised provident fund beyond the specified limit is taxable, i.e. exceeding 12% of the salary. If the contribution to a superannuation fund which is approved exceeds Rs 1.5 lakh, it will be considered as perquisite for the employee.
In the same way, an assessee can avail a deduction on contributions to NPS for up to 14% of the salary if the Central Government is the contributor and up to 10% of the salary if contributed by any other employer.