Old Vs New Tax Regime: Changes In Implications On EPF, NPS Contributions

Since its announcement at the Union Budget, there has been a lot of confusion on the changes that come with the new tax regime and the question as to what will suit an individual better.

At the Budget 2020, a new and optional tax regime was introduced wherein lower tax rates could be availed if one foregoes commonly claimed exemptions/deductions.

Taxable Income Slab (Rs)	Existing Tax Rates	New Optional Tax Rates For FY 2020-21
0-2.5 Lakh	Exempt	Exempt
2.5-5 Lakh	5%	5%
5-7.5 Lakh	20%	10%
7.5-10 Lakh	20%	15%
10-12.5 Lakh	30%	20%
12.5-15 Lakh	30%	25%
Above 15 Lakh	30%	30%

While there are several aspects to be considered and the ultimate decision to chose a particular tax regime largely depends on the individual's income structure and debt commitments, here are the changes in tax implications on EPF and NPS contributions to help you decide better.

Employees' Provident Fund (EPF)

Employer's contribution
In the existing tax regime (FY 2019-20), an employer's contribution of up to 12 percent of an employee's salary is tax-free. Any contribution exceeding the 12 percent in a financial year is taxable in the hands of the employee.

These rules remain unchanged under the new tax regime.

Employee's contribution

In the existing tax regime (FY 2019-20), your contribution towards EPF or any recognised provident fund is exempt up to 12 percent of the salary (same as the employer's share) under section 80C of the Income Tax Act.

If you opt for the new tax regime, you will not be able to claim tax deductions on your contribution under section 80C.

Interest earned and maturity amount

The interest earned and maturity amount of an EPF account will continue to be tax-free under old as well as new tax regime.

National Pension System (NPS)

Employer's contribution

Employer's contribution to the employee's NPS account (as part of salary) is eligible for tax deduction under Section 80CCD (2). The maximum amount eligible for deduction is 10 percent of basic + DA. For central government employees, the maximum amount eligible for deduction is 14 percent of basic + DA.

Under the new tax regime, the benefit of tax exemption on the employer's contribution under section 80CCD(2) remains.

The employee can opt to rejig their salary structure to opt for this tax deduction if their workplace permits it.

"Deduction under sub-section (2) of Section 80CCD (employer contribution on account of employee in notified pension scheme) and Section 80JJAA (for new employment) can be claimed," the Finance Bill 2020 said.

Employee's contribution

Under section 80CCD(1), which is a part of section 80C claims, a maximum tax deduction of 10 percent of salary is allowed. For a self-employed taxpayer, this limit is 20 percent of the gross income.

An additional self contribution of up to Rs 50,000 towards NPS is eligible for tax deduction under section 80CCD(1B). This tax exemption of up to Rs 50,000 is on contribution towards NPS, over and above the Rs 1.5 lakh per financial year limit under section 80C.

However, under the new income tax regime, you cannot seek deductions on employee's contributions towards NPS under section 80CCD(1) and 80CCD(1B).

A change that is applicable to EPF as well as NPS

In the Budget 2020, it was also proposed that an employer's contribution exceeding Rs 7.5 lakh a year towards NPS, superannuation fund and EPF will be taxable in the hands of the employee.