Budget 2026 spotlight: Experts urge to fix Double taxation on the employer NPS contribution
The Union Budget is the comprehensive financial statement of the government's capital, revenue, and expenditure. As the budget is closing in, experts from the FIPI (Federation of Indian Petroleum Industry) pointed out a lack of clarity in the Income-tax law that may result in double taxation for salaried employees when their employer contributes to the National Pension System (NPS).
The problem is that when an employer contributes money to an employee's NPS account, that amount can end up being taxed twice because of the unclear tax rules. The experts explained how the tax rules for NPS are confusing on the basis of pre budget memorandum 2026-27.
What law currently say
Under Section 17(1)(viii) of the Income Tax Act, the contribution of the employer to employees' NPS account is treated as part of employees' salary. Because this amount becomes taxable income for the employee.
On the other hand The Finance Act, 2020, modified the definition of “perquisite” (extra benefits given by an employer). After this change, the same NPS contribution can also be taxed as a perquisite in certain situations. This creates confusion and an extra tax burden for the salaried employees
Experts say that because of the confusion and fear of being taxed twice, many employees hesitate to choose NPS if it is not compulsory for them. If this happens, it goes against the main purpose of NPS, which is to encourage people to save for retirement.
Also, due to unclear rules, the salary under Section 17(1)(viii), and perquisite (extra benefit) under Section 17(2)(vii), they mentioned that the employer’s contribution to an employee’s NPS should be taxed only once.
What we can look forward to in the 2026 budget :
It should be clear that the uncertainty and overlapping tax rules are to avoid double taxation.
And the experts are asking the government to clarify the law in Budget 2026-27 and ensure employees are not unfairly taxed. So that employer NPS contributions are included in income only once, employees will feel more confident choosing NPS, and the retirement savings goal of NPS will be protected.
As reported by the Upstox News Desk, "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.
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