Will Budget 2024 be NPS friendly?

Key Takeaways-

• NPS is a practical and sought-after way to build a financial safety net for your golden years.
• It offers advantages, such as tax benefits, a wide range of investment options, and portability, making it an attractive option for retirement planning in India.
• It has been proposed to provide tax breaks on NPS contributions under the new tax structure to align with the existing tax benefits under the old regime.
• There should be emphasis on making the annuity portion of NPS tax-free for individuals aged 75 and above, thus aiming to ease the tax burden for senior citizens in their retirement years.

What is NPS?

The National Pension Scheme (NPS) is like a long-term savings plan for your retirement, similar to putting money into a bank account each month. Just like the bank account, you contribute a certain amount at regular intervals into your NPS account, and over time, it grows through investments.

The money you put in the NPS doesn't just sit there idly. It gets invested in various financial instruments such as stocks, bonds, and government securities, which have the potential to grow your savings over time.

When you finally retire and it's time to enjoy the fruits of your labour, the NPS fund will provide you with a regular income, thus ensuring that you have financial security even after you stop working. Plus, the contributions to the NPS also come with tax benefits, just like the special tax advantages you get while contributing to your retirement savings.

Budget 2023

According to the Pension Fund Regulatory and Development Authority (PFRDA), as of December 2023, the NPS had approximately 17 million subscribers. The NPS Assets Under Management (AUM) also saw a year-on-year growth of over 22%, standing at ₹8.99 lakh crores at the end of the year. And the number of new monthly subscribers under the scheme has been increasing ever since.

This is because investing in this scheme comes with several tax benefits. Employees contributing to NPS are eligible for a tax deduction of up to 10% of their salary with a threshold limit of ₹1.5 lakh. Plus, the employer's contribution towards NPS of an employee is also eligible for a tax deduction of up to 10% of the employee's salary (in case of central government employees 14%).

In the previous budget, the government implemented tax concessions for senior citizens contributing to the scheme. The lump-sum withdrawal of 60% from NPS was made tax-free (and the rest 40% is invested in annuities). These tax concessions on NPS contributions and tax-free withdrawals have incentivised and assisted retirement planning for senior citizens.

Budget Expectations from the Retiring Sector

To foster long-term savings through NPS and alleviate tax burdens for seniors above 75, Deloitte has proposed to make the annuity portion of NPS tax-free for scheme-holders in that age group.

Based on available data from the PFRDA, these initiatives are essential as the number of NPS subscribers in the senior citizen category is likely to increase. By providing tax incentives and making the annuity portion tax-free, the government aims to ensure financial security and ease the tax liabilities of this demographic. Such provisions align with the broader goal of promoting long-term savings and easing the financial burden on senior citizens in India.

There is a call for tax breaks on NPS contributions under the new tax regime as well. As currently, an individual's contribution of up to ₹50,000 is deductible under Section 80CCD in the old tax regime but not in the new regime.

For government employees, a committee under Finance Secretary T V Somanathan was established last year to review the pension system and suggest improvements. The awaited Budget 2024 will determine if changes are required in the existing framework and structure of the scheme for government employees.

Conclusion

Hence, it’s important for the upcoming budget to address the growing retirement needs of citizens, especially in consideration of the aging population in future. NPS is a significant player in India's pension sector, with a growing subscriber base and increasing AUM. So, infusing the budget with measures aimed at supporting retirement savings and financial security for the soon-to-be-retiring sector would be remarkable indeed.