Budget 2024: Here’s what to expect on NPS benefits under new tax regime
4 min read • Updated: January 23, 2024, 1:33 PM
Currently, under the new tax regime the taxpayers can only claim one benefit while three separate deductions are allowed under the old tax regime.
Finance Minister Nirmala Sitharaman’s announcements on tax benefits will be keenly watched by all when she presents the Interim Budget on February 1. Taxpayers have high hopes that the Finance Minister may extend the benefits of the National Pension System (NPS) under the new tax regime. Any such announcement could be a game changer as the NPS is aimed at promoting retirement savings and social inclusion.
The Finance Minister in the previous budget extended the benefit of Section 80CCD(2) of the Income-tax Act, 1961, to NPS under the new tax regime. This has allowed tax benefits on the employer's contribution to an employee's NPS account.
However, taxpayers are expecting more this year as a deduction of ₹50,000 for NPS under section 80CCD(1B) is allowed under the old tax regime. This is in addition to the benefit under 80CCD(2).
The additional deduction of ₹50,000 over and above ₹1.5 lakh limit under section 80C in the old tax regime has played a key role in the promotion of the retirement saving scheme.
According to reports, the government is likely to announce this benefit under the new regime to achieve its twin objective of popularising the retirement savings scheme and bringing more taxpayers under the new tax regime.
The government may allow the exemption on NPS investment under the new tax regime similar to the existing provisions under the old tax regime. The Pension Fund Regulatory and Development Authority (PFRDA), the apex body that manages the NPS, has reportedly proposed this change, according to reports.
There have also been demands for placing NPS at par with the Public Provident Fund (PPF). The PPF investments come under exempt-exempt-exempt (EEE) category, which means contributions, interest and withdrawals are tax-free. NPS has a partial EEE tax status as contribution and interest are tax-free while a certain percentage of withdrawals attract income tax.
Tax benefits available for NPS under new tax regime
The new tax regime was launched on April 1, 2020, to provide a simple tax structure and lower tax rates to individual taxpayers. Most tax exemptions and deductions were not allowed under the new regime. However, NPS-related deduction under 80CCD(2) was extended to taxpayers in the new regime.
Currently, under the new tax regime the taxpayers can only claim one benefit while three separate deductions are allowed under the old tax regime. Tax benefits can only be claimed on an employer's contribution to an employee's NPS account under the new regime.
Tax deductions for NPS in the new tax regime can be a booster for individual taxpayers to join the pension scheme and save for post-retirement years.
NPS tax benefits under old tax regime The taxpayers opting for the old tax regime can claim deductions under three provisions of Income-tax Act, 1961. Section 80CCD(1): Salaried employees can claim up to 10% of the salary. This should be within the overall limit of ₹1.5 lakh under section 80CCE, which is the combined limit for investments under section 80C, 80CCC and 80CCD(1). The self-employed individuals can claim a deduction of up to 20% of their gross income within the overall limit allowed under section 80CCE. 80CCD(1B): A deduction of up to ₹50,000 over and above the limit under section 80CCE for salaried and self-employed individuals is allowed under this section. 80CCD(2): An additional deduction of up to 10% of salary on the contribution made by the employer (14% in case of the central government as an employer) is allowed. What is NPS?
NPS was launched in 2004 for government employees. It was later opened for all citizens in 2009. NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA).
As of December 31, 2023, assets under management of NPS were ₹33,034 crore against ₹26,700 crore at the end of the previous fiscal year.
NPS is a market-linked long-term investment plan designed to promote retirement savings. The scheme is open to all aged between 18 to 70 years.
The NPS is a voluntary pension scheme. Subscribers can make regular contributions or one-time contributions in a year to their pension account. For government employees, a certain percentage of monthly income is contributed to the pension account. A matching contribution is made by the government for employees.
These contributions are invested in a variety of assets such as debt, government securities, and equities as per the choice and risk appetite of a subscriber.
At the retirement age, NPS allows withdrawal of up to 60% of the corpus in a lump sum. The remaining corpus is used to purchase an annuity for providing a monthly pension to the subscriber.
NPS provides market-linked returns as the funds are managed by professional fund managers. The Pension Fund Regulatory and Development Authority (PFRDA) appoints these fund managers who charge nominal fees for managing funds.