To boost retirement savings for National Pension System (NPS) subscribers, Finance Minister Nirmala Sitharaman announced in her Union Budget speech for FY2024-25 a hike in the non-government employer’s contribution to the scheme from 10 per cent to 14 per cent. Earlier, this limit was only available to government employees. This decision will ensure all NPS subscribers enjoy equal rights and benefits from the scheme when they retire after reaching 60.

The government abolished the DA-linked old pension scheme (OPS) after introducing NPS in 2004. It was initially for government employees, and in 2009, it was also extended to the corporate sector. In the OPS scheme, the retired government employees get 50 per cent of their basic salaries plus dearness allowance, which increases periodically as per government norms.

In her Budget speech in parliament on Tuesday, Sitharaman said the government wants to make NPS more attractive and flexible. Currently, a committee has been set up to look into different aspects of the pension scheme to ensure accessibility, convenience, and optimum results.

Also Read: Union Budget 2024-25: Good News For NPS Subscribers! Deduction Limit Hiked To 14%

Regarding employer’s contributions in NPS, Sitharaman said “To improve social security benefits, deduction of expenditure by employers towards NPS is proposed to be increased from 10 to 14 per cent of the employee’s salary. Similarly, deduction of this expenditure up to 14 per cent of salary from the income of employees in the private sector, public sector banks and undertakings, opting for the new tax regime, is proposed to be provided.”

Is NPS A Retirement Saving Tool Or A Tax Planning Instrument?

NPS is a long-term savings scheme for financial security in old age. However, many people invest in NPS for tax benefits rather than pensions or retirement savings. For example, young people might be less bothered about their long-term financial goals and more concerned about their tax outgo, which they could think would jeopardize their current needs, such as a car and other items from the discretionary list. However, experts generally advise people to look at NPS from a retirement savings lens rather than a tax-saving lens.

Although the focus is primarily on retirement planning, the government has also provided tax benefits for NPS contributions in both the old and new tax regimes of the Income Tax Act 1961.

Also Read: Budget 2024-25: FM Sitharaman Introduces NPS Vatsalya To Allow Parents To Open Account On Behalf Of Minors

Here’s what the decision to increase the limit in employers’ contributions means for subscribers.

Higher Employers’ Contribution To NPS

Says Sriram Iyer, CEO of HDFC Pension: “The NPS proposals in Budget 2024 take significant steps towards the government’s goal of making India a pensioned society by 2047. The extra 4 per cent contribution under the corporate NPS scheme offers salaried employees additional tax savings and boosts their retirement funds. This change also helps companies streamline their contributions exclusively towards NPS.”

As NPS is optional, many non-government employers do not offer NPS options to their employees. However, the recent changes in the NPS ecosystem, such as ease of use, the flexibility of emergency withdrawal, annuity planning, the flexibility of deposits, tax benefits, etc., make it an attractive investment choice. It could also be a tool to attract or retain employees. Here are some benefits from higher employers’ contributions.

More Savings:

Employers’ increased contribution limit will improve employees’ savings and help them create a large corpus for retirement. As of June 15, 2024, corporate subscribers had grown 14.64 per cent in one year, compared to only an 8.36 per cent increase in government subscribers, as shown by the NPS data. Given the increasing benefits of corporate NPS, more employees will now opt for it.

Higher Tax Savings:

A change in the limit from 10 to 14 per cent in employers’ contribution will help, especially those opting for the new tax regime. People opt for NPS in the old tax regime because it helped save tax under Section 80CCD (1) of the Income-tax Act, 1961, under the overall limit of Rs 1.5 lakh as well as under Section 80CCD (1B) for an additional Rs 50,000. While these benefits are not available in the new tax regime, taxpayers can claim tax deductions under Section 80CCD (2) in the new regime, which is ‘contribution by the employer’. This is where the NPS becomes attractive in the new regime as well.

Anuj Kesarwani, a certified financial planner, chartered trust and estate planner, and founder of Zenith Finserve, explains, “If you have a monthly basic salary of Rs 1 lakh, you can contribute 14 per cent of your basic salary to the NPS. Your employer can also make a matching contribution. This means you will be eligible to receive Rs 14,000 (Rs 1,00,000 X 14 per cent) tax-free monthly contribution from your employer. This limit was 10 per cent before the Budget. So, your benefit would have been Rs 10,000 (Rs 1,00,000 X 10 per cent)”.

With the additional tax-free monthly benefit of Rs 4,000 due to this new amendment, he says, “If you were to work for 20 more years and your salary increases by an average rate of 10 per cent yearly and your NPS portfolio gives an average return of 9 per cent annually, then this little additional contribution can turn to almost Rs 60 Lakhs.”

Benefit Of Lock-In And Compounding:

NPS accounts mature at retirement upon subscribers’ turning 60 years of age. Indirectly, it encourages long-term savings by specifying a lock-in. However, in emergency needs, one can make partial withdrawals. The encouraged saving in NPS and enhanced employers’ contribution would mean investment duration spanned over 2-3 decades. Thus, there will be higher compounding benefits due to this.

According to Ranbheer Singh Dhariwal, chief executive officer of Max Life Pension Fund Management, “The proposed increase in employer contributions to NPS from 10 to 14 per cent reinforces the role of employers in fostering long-term financial and social security for their workforce. Such measures are pivotal in enhancing financial stability for families across India, ensuring every citizen looks forward to a stable retirement.”

Kesarwani suggests, “The employer’s contribution of 14 per cent of the salary is eligible for full tax deduction under the new regime of income tax. So, in order to avail this benefit, the employees must opt for the new regime”.

The enhanced limit is beneficial for tax savings and also for creating a higher retirement corpus. People who want a steady income after retirement may consider NPS, as it is mandatory to allocate 40 per cent of the corpus to an annuity plan, which can go up to 100 per cent if a subscriber wants it. So, whether for tax benefits or long-term savings, NPS helps subscribers build a robust retirement corpus.