Ahead of Union Finance Minister Nirmala Sitharaman’s interim Union Budget for FY2024-25 on February 1, expectations are high across the board. The National Pension System (NPS) subscribers will closely follow her speech in the Lok Sabha as they plan their investments for the new financial year. For the stock markets, 2023 had been a year of stellar performance. So, expectations from the upcoming budget are palpably high for the NPS investors as it significantly influences the capital market. Let’s understand in detail What NPS Investors Should Watch Out For this year.

NPS is a market-linked long-term investment instrument designed for retirement planning. Anyone aged 18 to 70 can invest in the scheme. It offers a pension with provisions for systematic and premature withdrawal. The subscriber can withdraw 60 per cent of the accumulated funds after they reach 60 years, either as a lump sum or through a systematic withdrawal plan (SWP), with the remaining 40 per cent through annuities.

Since 2009, when it opened for all citizens, NPS has been a preferred investment tool for tax benefits. However, in FY2023-24, the government made the new tax regime a default one where the basic exemption limit was enhanced but several deductions and exemptions were abolished, including the NPS tax benefits under section 80CCD(1) and 80CCD(1B).

As NPS focuses on retirement planning, tax benefits are critical to encourage people to subscribe to the scheme, even if they choose the new tax regime. While salaried employees enjoy tax benefits on the employers’ contribution to NPS, the self-employed lack incentives to choose NPS in the new tax regime. So, to encourage voluntary contributors, the government may announce new measures. Here is what experts expect from Budget 2024-25.

Also Read: Investing In NPS? Here’s How to Check, Download NPS Statement

Expectations From Budget 2024-25 

Kurian Jose, CEO, of Tata Pension Management, says, “The Rs 50,000 deduction that was allowed under NPS under Section 80CCD(1B) under the new tax regime, which was removed w.e.f. Apr 1, 2023 should be brought back in the budget for FY25. Going one step further, we would advocate that this limit should be increased to Rs 1,00,000, under both tax regimes. This benefit under Sec 80CCD(1B) was quite popular with tax planners and largely played a key role in getting individuals investing into the NPS whether they were employed in the organized sector or otherwise. We believe that getting this exemption back under the New Regime could play a large role in popularising NPS.”

“Subscribers under corporate NPS can claim tax exemptions up to 10% of basic salary, under Sec 80CCD(2) of the Income Tax Act. This could be increased to 12% of basic salary; in line with what is allowed for provident funds and subsequently to 14% in line with what is allowed for the government sector employees. This has also been a recommendation by PFRDA for some time now.”

Anuj Kesarwani, a certified financial planner and founder of Zenith Finserve, says, “NPS comes across as a retirement planning investment instrument, especially for the undisciplined, unadvised investor. The recent amendments allowing tax-free corpus in installments are a game-changer for saving taxes in the withdrawal phase. It ticks all the three golden trios of investing, safety, liquidity (when needed) and returns.”

He says, “The deduction u/s 80C is hardly of any use as it has so many components available. Also, the current deduction of Rs. 50,000 on contribution u/s 80CCD(1B) is insufficient. Given the critical problem of funding, the deduction for NPS u/s 80CCD(1B) should be increased to at least Rs 1.2 lakh annually in this budget. This will incentivize investors to invest at least Rs.10,000 monthly towards their retirement goal. This should grow well by the time of retirement.”

He adds that as per the current law, employed people can change the regime every year, but self-employed cannot, whereas retirement planning is necessary for all. So, to bring parity, the government should either allow the self-employed to change the regime every year, like it is permitted for employed people, or allow a deduction for NPS under the new regime as well.

NPS Tax Benefits In A Nutshell 

Old Tax Regime: 

Section 80CCD(1): Tax deduction of up to 10 per cent of the salary. This should be within the overall limit of Rs 1.5 lakh under section 80CCE, the combined limit on investment under section 80C, 80CCC, and 80CCD(1). For self-employed individuals, a deduction of up to 20 per cent of gross income is within the overall limit under section 80CCE.

80CCD(1B): Tax deduction up to Rs 50,000 under section 80CCD(1B) over and above the limit under section 80CCE for salaried and self-employed individuals.

80CCD(2): Deduction up to 10 per cent of salary on the contribution made by the employer (14 per cent in case of the central government as an employer) over the Rs 1.5 lakh limit under section 80CCE.

New Tax Regime: 

In the new tax regime, NPS has only 80CCD(2) as tax benefits, applicable only to the employers’ contributions.