In recent times, corporate National Pension System (NPS) has become a key component of salary restructuring in India. Chartered accountants have noticed a marked increase in employer inquiries about including NPS as part of the employee compensation package. This shift is primarily driven by the new tax regime, where individuals are looking for ways to reduce their tax burden.

Corporate NPS and Tax Savings

The corporate NPS scheme, although not new, has gained more attention because of its tax benefits. Section 80CCD (2) of the Income-tax Act, 1961 allows employees to claim tax deductions on their employer's contribution to NPS, up to 14 percent of their basic salary and dearness allowance (DA). This deduction is one of the few available exemptions under the new tax regime. In India’s updated tax structure, employees earning up to Rs 12.75 lakh (including standard deductions for salaried employees) can take advantage of this tax benefit.

Employers are increasingly restructuring salary packages to convert part of special allowances into corporate NPS contributions, which enables employees to reduce their taxable income and, ultimately, their tax outgo. This move is being seen as a strategic benefit both for employees and employers, who are motivated to optimize compensation structures to make them more attractive.

Employee Behaviour and the Shift to the New Tax Regime

Many employees are switching to the new tax regime, with the realization that the old tax regime no longer offers as much benefit for most salaried workers. The old tax regime primarily benefits employees with salaries above Rs 24 lakh who claim deductions on various eligible expenses, such as home loan interest, insurance premiums, and donations. However, with the rise of the new tax regime, salaried employees with incomes below Rs 24 lakh are more inclined to opt for the simpler, non-deduction-based system.

Special Tax Break for Rent and NPS

For individuals paying rent to parents to claim House Rent Allowance (HRA), there are additional considerations in the new tax regime. Taxpayers may attempt to increase the rent they pay to claim HRA. However, there are rules and regulations around such claims, and income tax authorities closely monitor discrepancies between rent claims in successive years.

Benefits of Corporate NPS and Employer Contributions

As employers continue to recognize the advantages of offering corporate NPS, they are adjusting their employee compensation packages to include these contributions. Employers who contribute to their employees' NPS see it as a long-term investment, benefiting both the employee and the organization. This growing interest in NPS underscores a shift in corporate strategies, with a focus on enhancing employee benefits while also taking advantage of available tax exemptions.

Employees, on the other hand, are increasingly aware of how they can leverage corporate NPS to reduce their taxable income and save on taxes, making it an attractive option as they restructure their salary packages. This trend points to a broader understanding of how corporate benefits can be used strategically to meet both employee financial goals and organizational objectives.

As more and more people look at their future retirement planning, corporate NPS provides a beneficial long-term savings avenue in addition to the immediate tax savings available under the new regime.

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