Understanding Tax Exemptions

This is the part of the contribution that is deducted from an employee's gross salary. It is given by the Pension Reform Act, 2014 to be 8% of the employee's BHT (Basic salary, Housing allowance, Transport allowance). The employer also pays pension on behalf of the employee, and theirs is 10% of the employee's BHT. 

Also known as group life insurance, it is an insurance policy that a company is mandated by the Pension Reform Act, 2014 to take on behalf of their employees in the event of death. It is to be taken at 3 times the total annual emolument of the employee, on which the company will pay a specified premium as dictated by the National Insurance Commission (NICOM).

This is a mandatory contribution that an employee is supposed to make at 2.5% of their basic salary to acquire loans for developing, buying, or renovating houses. Contributors of the Fund can get long-term loans from Mortgage Institutions.

An organisation is required to take out health insurance on their employees by registering with Health Maintenance Organisations, as mandated by the National Health Insurance Scheme, 2004. The amount to be paid for health insurance is not given by law, but is determined by the HMO an organisation uses. Prices vary, depending on the combination of services the HMO offers, and the extent of medical care the employee receives.

Gratuity is a lump sum benefit provided by the employer to reward a qualified employee at retirement for his/her meritorious and long service to the Organization, according to the Nigerian Life & Provident Company (NLPC) Pension Fund Administrator Limited. Employers can establish a Gratuity Scheme in addition to the obligatory Contributory Pension Scheme (CPS) or Defined Benefit Scheme (DBS).

According to Section 32 and Section 33 of PITA, these 5 tax exempts must be deducted first before the consolidated relief allowance (CRA). This is an amendment to the initial regulation that allowed CRA to be deducted first before tax exempts. This also gave a new definition for "gross income", according to Section 33(2) of the PITA Act, where gross income is now total income less tax exempts.

Bear in mind that the only tax exempts that are deducted from an employee's salary include the employee pension and the NHF. The rest; life insurance, HMO, and gratuities are paid by the employer for the employee, and do not come out of the employee's salary.

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