NPS deductions that are currently available under old and new income regimes
It is a defined contribution-based retirement savings scheme to provide old age security and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It follows the Exempt Exempt tax regime wherein contributions and accruals are tax-exempt, but withdrawals are partially taxable.
Deduction in respect of NPS contributions under the Income Tax Act, 1961 is available as below:Individual contributions: Up to 10% of salary (for salaried individuals) or 20% of gross total income (for self-employed individuals) under section 80CCD(1) of the Act, clubbed with the limit of Rs 150,000 under Section 80C in the old tax regime.
Additional flat deductions up to Rs 50,000 are available for voluntary contributions to NPS under Section 80CCD(1B) of the Act in the old tax regime.
Employer contributions: Up to 10% of the employee’s salary are eligible for deduction under Section 80CCD(2) of the Act in both the old income tax and new income tax regime.
Budget 2024 expectations: What are the changes salaried taxpayers want in NPS?
Presently, the additional deduction in respect of voluntary contribution of Rs 50,000 under section 80CCD(1B) is allowed under the old tax regime only. The government may consider allowing the said deduction under the new tax regime also. This would serve a two-fold purpose with the taxpayers enjoying additional deduction under the new tax regime and higher investment in the retirement scheme aligned with the government’s objective to promote the new tax regime.Currently, the deduction in respect of the employer’s contribution (capped at 10%) to NPS is allowed under both the old tax regime and the new tax regime. The government may consider at increasing this limit to 12% (aligned with the exemption of employer’s PF contribution up to 12%). This may benefit all salaried individual taxpayers. However, factors such as a decrease in disposable income and additional perquisites (if the aggregate limit of Rs 750,000 of employer’s contribution to PF, superannuation, and NPS is crossed) would need to be taken into consideration.
| Budget 2024 expectations: Impact of NPS | ||
| Particulars | Existing (Rs) | Expected (Rs) |
| Taxable salary income | 60,00,000 | 60,00,000 |
| Less: Employer cont. to NPS [80CCD(2)] | (3,00,000) | (3,60,000) |
| Less: Employee cont. to NPS [80CCD(1B)] | – | (50,000) |
| Taxable income | 57,00,000 | 55,90,000 |
| Total tax liability | 16,13,040 | 15,75,288 |
*assuming basic salary of Rs 30 lakh
** existing employer’s NPS contribution at 10% of basic and expected to increase to 12%
New tax regime to be preferred regime of choice
This regime offered significantly reduced tax rates for the individuals who choose to forego certain deductions and exemptions, the most common being deductions under Section 80C in respect of LIC premiums, PPF deposit, etc., Section 80D for medical insurance premiums, Section 80G for donations etc. and exemptions under Section 10(13A) for HRA, Section 10(5) for leave travel allowance (LTA), Section 10(32) for minor’s income etc. The new tax regime offers lower tax rates spread across six income levels as compared to the four-level structure under the old regime.
Other prominent Budget expectations
The standard deduction, presently at Rs 50,000 is allowed in the new tax regime also. Given the increased cost of living and inflationary pressures, the government may consider increasing the limit to Rs 75,000 in Budget 2024, which will benefit all salaried individuals regardless of the tax regime opted for.
Further, the basic exemption limit may be raised by at least Rs 50,000 under the new tax regime which will benefit all individual taxpayers (salaried or non-salaried) opting for the new tax regime. This will help to increase the disposable income of the individual taxpayers which may further boost the investments. These changes are expected to incentivise individuals to opt for the new tax regime, potentially establishing it as the default regime of choice.
While the Interim Budget in February 2024 did not provide any major benefits, it would be interesting to see if the government provides benefits in the form of a ‘Thanksgiving Budget’ for the populace or not, while navigating its fiscal responsibilities.
Supported by Manavi Gupta, Director, Vialto Partners