How does Keka calculate taxable employer PF and NPS contributions above the applicable limit? – Home Page

The tax treatment of employer contributions towards Provident Fund (PF) and National Pension System (NPS) depends on how the NPS component is configured in the salary structure.

The calculation differs based on whether NPS is configured as a system-defined Contribution or as an Allowance under Exemptions.

Scenario 1: NPS configured as a system-defined Contribution

If the NPS component is created as a Contribution and the system-defined NPS component is used in the salary structure, the system considers the employer's PF and NPS contributions together when determining the ₹7.5 lakh exemption limit.

For example:

Employer PF contribution: ₹8,00,000
Employer NPS contribution: ₹1,00,000
Total employer contribution: ₹9,00,000
Exempt limit: ₹7,50,000
Excess contribution: ₹1,50,000

In this case, ₹7,50,000 is considered within the exempt limit, and the remaining ₹1,50,000 is considered a taxable perquisite and added to the employee's taxable income.

Scenario 2: NPS configured as an Allowance under Exemptions

If the NPS component is created as an Allowance and configured under the Exemptions section instead of using the system-defined NPS Contribution component, the calculation is handled differently.

For example:

Employer PF contribution: ₹8,00,000
NPS contribution: ₹1,00,000
Combined contribution: ₹9,00,000
Exempt limit: ₹7,50,000

In this configuration, the NPS amount is treated separately as an exempt allowance. Therefore, only ₹50,000 is considered taxable as the excess employer contribution, instead of ₹1,50,000.

How can I verify the NPS configuration?

When reviewing the calculation, first check how the NPS component has been created and configured.

Go to Salary Structure.
Check the NPS component.
Confirm whether NPS is configured as a system-defined Contribution or as an Allowance.
If NPS is configured as a system-defined Contribution, verify that the employer PF and NPS contributions are considered together for the ₹7.5 lakh limit.
If NPS is configured as an Allowance under Exemptions, verify that the NPS exemption is handled separately.
Based on the configuration, verify the taxable perquisite and taxable income reflected in payroll.

Note: The tax treatment depends on the NPS component configuration in the salary structure. Verify the configuration before comparing the system calculation with the expected taxable amount.