NPS contribution by employers: Experts flag double-taxation risk, suggest fix for Budget 2026

As Budget 2026 approaches, experts at the Federation of Indian Petroleum Industry (FIPI) have highlighted an ambiguity in tax rules that can lead to double taxation for salaried employees due to employer contributions to the National Pension System (NPS).

In their Pre-Budget Memorandum for Union Budget 2026-27, FIPI experts said the contribution to NPS accounts of the employee is includible in the taxable income of an employee-assessee as 'salary' in view of provisions of section 17(1)(viii) of the Act. However, Finance Act, 2020, amended the definition of 'perquisite', allowing inclusion of such contribution also in certain circumstances.

"Therefore, the said amendment is apparently capable of leading to double taxation in the hands of employee-assessee of very same amount of employer's contribution to his NPS account first, as salary and then again as perquisite," FIPI experts said.

According to the experts, The Finance Act, 2020, intended to bring to tax that part of the contribution made by the employer to the NPS account of the employee, which was exempt from tax, and that too only when such contribution exceeded the specified limit of ₹7.50 lakh along with contribution to other two specified funds.

What can be done in Budget 2026?

According to FIPI, the ambiguity inserted by the Finance Act, 2020, in the law can discourage employees from opting for NPS, where it is not mandatory, in the fear of double taxation or unnecessary litigation, and in turn, defeat the social objective of NPS.

Experts said that double taxation can be avoided if the amount of contribution made by the employer to the NPS account of the employee is included in the total income of the employee, either as salary under section 17(1)(viii) or as a perquisite under section 17(2)(vii).

"To avoid double taxation, the amount of contribution made by employer in the NPS account of employee, can be included in total income of such an employee either as salary under section 17(1)(viii) or as perquisite under section 17(2)(vii)," FIPI said.