How Do NPS Arrears Affect Employee Taxes? Let's Discuss This Scenario

Scenario Analysis: Employee NPS Contributions

Please consider a scenario where an employee joins the firm on 01-04-2010. The employer does not demand NPS payments until 31-03-2012, as employees on probation were not required to remit the PF as per the old scheme. However, the employer starts deducting NPS from 01-04-2012 and demands the payment of arrears from 01-04-2010. The employee remits the arrears on 01-04-2012, with equal contributions made by the 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/-

Tax Implications

Now, from the tax angle, if we see, the employer's contribution to NPS in FY 2012-2013 (10% Basic + DA) is a part of the taxable income of the employee. Further, the employer's contribution to the arrears in the NPS (contribution from 01-04-2010 to 31-03-2012) is also a taxable portion for the employee since the

The amount was remitted in the FY 2012-13.

Taxable Income Calculation

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

- Now, if we see, the employee's 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 the salary of the employee includes the Employer's contribution (10% of Basic + DA) = ₹40,000 as well as arrears contributed by the employer (₹6,000). However, the deduction permissible under Sec 80CCD(2) is up to 10% of Basic + DA received during the year, and hence the arrears contributed by the employer cannot be included.

Summary

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

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

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