Navigating NPS Employer Contribution and Arrears: Tax Implications and Deductions

Please consider a scenario where the employee joins the firm on 01-04-2010. The employer does not demand NPS payments till 31-03-2012 (Since employees on probation were not required to remit the PF as per the old scheme). However the employer starts deducting NPS form 01-04-2012 and demands the payment of arrears from 01.04.2010 and the employee remits the arrears on 01-04-2012 with equal contributions made by employer.
Contribution towards NPS- FY 2012-2013 (imaginary figures)
- Employee’s ( 10 % of Basic +DA) = 40,000/-
- Employer’s ( 10 % of Basic +DA)=40,000/-
Arrears in NPS from 01-04-2010 to 31-03-2012- remitted on 01-04-2012.
- Employee’s = 60,000/-
- Employer’s =60,000/-
Now at the tax angle if we see,
Employers Contribution to NPS in FY 2012-2013 ( 10 % Basic + DA) is a part of the taxable income of the employee. Further, employer contribution of the arrears in the NPS (Contribution from 01-04-2010 to 31-03-2012) is also taxable portion of the employee since the

Contd .....

the amount was remitted in the FY 2012-13.

So as per the above figures.

Taxable Income = Income of the employee +Employer’s contribution ( 10 % of Basic +DA)+ Employer’s contribution of arrears

- Now if we see, the employees contribution of ( 10 % of Basic +DA) = 40,000/- can be included in (Sec 80CCD (1)) . However the arrears contributed by the employee (Employee’s = 60,000/-) cannot be included under (Sec 80CCD (1)) as only a maximum of 10 % of Basic +DA can be allowed in (Sec 80CCD (1) and it has already been deducted.

- Further, the taxable component of salary of the employee includes Employer’s contribution ( 10 % of Basic +DA)=40,000/- as well as arrears contributed by the employer (Rs 6,000/-). However the deduction permissible under Sec 80CCD(2) upto 10% of basic + DA received during the year and hence the arrears contributed by the employer cannot be included.

So in short –

1. The arrears contributed by the employee cannot be claimed as deduction (in the overall limit of 1 Lakh)

2. The arrears contributed by the employer is taxable for employee.

Is there a way out or is there anything left out in the above calculations.