(INDIA) — The single most important point for NRIs and Indian-origin professionals moving money across borders is this: India may give an upfront deduction for employer National Pension System (NPS) contributions under Section 80CCD(2), but both India and the U.S. can still tax the growth, creating a real “double taxation” risk.
This is why retirement savers are watching India’s Budget 2026 closely. Several tax experts are urging the government to fix what they see as a structural mismatch: employer NPS contributions can be tax-deductible, yet the interest/returns on amounts above a statutory cap can be taxed each year.
For Indians who later become U.S. tax residents, the exposure can widen because the U.S. tax system may also pick up income and reporting on foreign retirement accounts.
This article is current as of Monday, January 19, 2026, and is written for tax year 2026 (returns filed in 2027).
1) Budget 2026 context: why “double taxation” is back in the spotlight
Experts are urging Budget 2026 to address double taxation on employer NPS contributions under Section 80CCD(2). The practical issue is the ₹7.5 lakh annual cap that applies across EPF + NPS + superannuation.
Once total employer contributions across those vehicles exceed ₹7.5 lakh in a year, the excess contribution becomes taxable, and interest/returns (accretions) on the excess can also be taxed annually. That yearly taxation can reduce the long-term compounding that retirement plans rely on.
For cross-border taxpayers, the same money may also create U.S. reporting and tax questions, depending on U.S. residency status and how the account is classified for U.S. purposes.
2) Current framework: how employer NPS contributions are taxed in India (and where the problem starts)
Employer contributions to NPS qualify for a deduction under Section 80CCD(2), subject to limits.
Key current criteria (India):
- 80CCD(2) deduction limit: employer contribution up to 14% of basic salary + DA. This applies to private sector, PSU, and government employees. The private/PSU limit was raised from 10% in Budget 2024.
- Overall “tax-free” cap: ₹7.5 lakh per year, combined across EPF + NPS + superannuation.
- Taxation on excess: the excess contribution is taxable, and the interest/returns on the excess are taxable annually.
Where double taxation shows up in practice:
A taxpayer may receive a deduction (or exclusion) on the contribution under 80CCD(2), but still face annual tax on returns tied to amounts above the ₹7.5 lakh cap. Over time, that makes the plan feel less like “EEE” treatment for the full amount.
⚠️ Warning: Don’t assume “deductible contribution” means “tax-free growth.” Under the ₹7.5 lakh cap rules, growth on excess amounts can be taxed every year in India.
3) Side-by-side comparison: India employer NPS vs. U.S. treatment when you become a U.S. tax resident
The U.S. does not “mirror” Section 80CCD(2). Once you are a U.S. tax resident (green card test or substantial presence test), you generally must report worldwide income. See IRS Publication 519 on residency rules via the IRS’ international taxpayers portal.
Here is a practical, criteria-based comparison for tax year 2026.
| Category | India: Employer NPS (Section 80CCD(2)) | U.S.: If you are a U.S. tax resident holding/receiving NPS benefits |
|---|---|---|
| Who is covered | Indian employees with employer NPS contributions | U.S. tax residents (green card or substantial presence) with any foreign retirement account exposure |
| Contribution deduction/exclusion | Deduction for employer contribution up to 14% of basic + DA under 80CCD(2) | No automatic “80CCD-style” deduction. Employer contributions paid abroad may still be treated as compensation depending on facts |
| Annual cap issue | ₹7.5 lakh combined cap across EPF+NPS+superannuation; excess is taxable | No ₹7.5 lakh concept. The key is whether growth is taxable currently and whether the account triggers information reporting |
| Tax on growth | Interest/returns on excess can be taxed annually in India | Growth may be taxable currently depending on classification (foreign pension vs. trust vs. other). Treaty relief is fact-specific |
| Withdrawals | Current rule discussed widely: 100% tax-free if corpus ≤ ₹8 lakh; 80% tax-free if corpus > ₹8 lakh | Distributions can be taxable in the U.S. depending on basis, treaty position, and prior inclusion of earnings |
| Reporting | Indian reporting under Indian rules | Possible FBAR (FinCEN 114) and Form 8938 filing, plus other forms depending on structure |
| Core risk | “Double taxation” inside India due to cap mechanics | Double taxation across countries if India taxes growth and the U.S. also taxes income or distributions |
Important U.S. caution: The U.S. tax classification of NPS is not stated on an IRS “NPS rule” page. Treatment often depends on plan terms, control, distribution rules, and treaty positions. Many filers need professional analysis.
For background, the IRS summarizes foreign asset reporting on its forms and publications page, and treaty concepts are discussed in IRS Publication 901 (U.S. Tax Treaties).
4) What experts want from Budget 2026 (and why NRIs should care)
The proposals being discussed are straightforward.
- Raise the ₹7.5 lakh cap to reflect wage inflation, and reduce annual tax friction.
- Exempt interest/returns fully so employer contributions do not lose their retirement-friendly character.
- Keep Section 80CCD(2) intact, and expand 80CCD(1B) from ₹50,000 to ₹1,00,000 for salaried and self-employed taxpayers.
- Clarify the tax treatment of withdrawal flexibility, including whether more withdrawals can be tax-free.
Stakeholder comments highlight how limits set years ago can become unrealistic. Abhishek Soni (Tax2win) has called for inflation-linked limits, suggesting ₹10–10.5 lakh for employer contributions and ₹3.3–3.5 lakh for employee contributions to reflect current salary levels.
Rajarshi Dasgupta (Aquilaw) has highlighted that higher-tax-bracket employees and self-employed individuals stand to gain most from better NPS incentives. Sonu Iyer (EY) has indicated Budget 2026 may focus more on administration than major rate changes.
For taxpayers who may later move to the U.S., the “why” is simple. A cleaner Indian tax rule reduces the chance you pay Indian tax annually on growth, then face additional U.S. tax and reporting complexity later.
5) NPS withdrawal rules: the current benchmark and the debate
The current flexibility often cited is:
- 100% tax-free withdrawal if the corpus is ≤ ₹8 lakh
- 80% tax-free withdrawal if the corpus is > ₹8 lakh
The debate is whether to expand tax-free treatment so retirement withdrawals are simpler and more attractive. For migrants, this can also matter for timing.
Taking certain withdrawals while still an Indian tax resident may produce a different result than taking them after you become a U.S. tax resident.
6) U.S. reporting rules that frequently surprise new immigrants and visa holders
If you become a U.S. tax resident in 2026 (filing in 2027), you may have foreign reporting even if India already taxes the income.
Foreign reporting thresholds (quick reference)
| Filing Status | FBAR Threshold | Form 8938 (End of Year) | Form 8938 (Any Time) |
|---|---|---|---|
| Single (in U.S.) | $10,000 aggregate | $50,000 | $75,000 |
| Married (in U.S.) | $10,000 aggregate | $100,000 | $150,000 |
FBAR is filed with FinCEN (not the IRS), but it is a core U.S. compliance item. Form 8938 is filed with your IRS return. For residency definitions and filing basics, IRS Publication 519 is the starting point (see the IRS international taxpayers portal).
📅 Deadline Alert: For tax year 2026, individual returns are due April 15, 2027. FBAR is due April 15, 2027, with an automatic extension to October 15, 2027.
| Tax Event | Deadline | Extension Available |
|---|---|---|
| Individual returns (Form 1040 / 1040-NR) | April 15, 2027 | To October 15, 2027 (Form 4868) |
| FBAR (FinCEN 114) | April 15, 2027 | Automatic to October 15, 2027 |
7) Examples with numbers: how the same NPS contribution can create different outcomes
Example A (India-only double taxation pressure)
– Basic + DA: ₹30,00,000
– Employer NPS at 14%: ₹4,20,000
– Employer EPF + superannuation combined: ₹4,00,000
– Total employer retirement contributions: ₹8,20,000
Result: Total exceeds ₹7,50,000 by ₹70,000. Under current rules, the ₹70,000 excess is taxable, and returns on that excess can be taxed annually.
Example B (Cross-border risk after moving to the U.S.)
Assume the same taxpayer becomes a U.S. tax resident in 2026 and still holds NPS.
– If foreign account balances (including bank accounts) exceed $10,000 at any time, FBAR may apply.
– If specified foreign financial assets exceed $50,000 (single, in the U.S.) at year-end, Form 8938 may apply.
Even if India taxes some growth annually, the U.S. still expects proper reporting. Foreign tax credits may help, but they are not automatic and depend on timing, sourcing, and documentation.
8) Common mistakes (and how to avoid them)
- Mistake 1: Assuming NPS is automatically “tax-deferred” in the U.S.”
Avoid it: Get a facts-based classification review. Use IRS guidance starting points like Publication 519 and Publication 901. - Mistake 2: Missing FBAR because “it’s a pension.”
Avoid it: FBAR is about foreign financial accounts and signature authority. Review all accounts and peak balances. - Mistake 3: Treating the ₹7.5 lakh cap as “NPS-only.”
Avoid it: The cap is combined across EPF + NPS + superannuation. - Mistake 4: Poor timing on withdrawals when moving countries.
Avoid it: Map residency dates in both countries before taking large distributions.
You are [X] if… (quick self-check)
You are India-focused if your only concern is whether employer retirement contributions exceed ₹7.5 lakh and trigger annual tax on excess growth.
You are cross-border exposed if you will be a U.S. tax resident in 2026 and still hold NPS, because you may face U.S. worldwide income rules and foreign asset reporting.
You are high-risk for double taxation if India is taxing annual growth on excess amounts and the U.S. may also tax income or distributions without clean matching relief.
Action items for tax year 2026: confirm total employer contributions against the ₹7.5 lakh cap; track NPS statements and cost basis; and review whether you meet FBAR ($10,000 aggregate) or Form 8938 thresholds before filing in 2027.
⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.
