Around 70 per cent of the personal taxpayers are projected to shift to the new tax regime, said Nitin Gupta, chairman, Central Board of Direct Taxes (CBDT), on October 10, 2023, adding that the Union Budget for financial year 2024 has made the new regime attractive.

So, will so many taxpayers projected to shift from the old tax regime to the new tax regime, will the popular National Pension System (NPS), which has no tax benefits in the new regime, remain as attractive? Let’s explore.

NPS has found favour with many taxpayers in the old tax regime because it helps save tax under Section 80CCD (1) under the overall limit of Rs. 1.5 lakh along with an additional Rs. 50,000 under Section 80CCD (1B) of the Income-tax Act, 1961. However, these benefits do not exist in the new tax regime.

So, the attraction dims except for where NPS is a part of the salary, and the employer contributes to it, because the employers’ contribution to NPS is still considered for tax benefits in the new tax regime. As it is a part of salary, it is not optional. But for the optional cases, does NPS still hold the same value without offering the most sought-after tax benefits?

Says Abhishek Kumar, a Securities and Exchange Board of India (Sebi) registered investment advisor and founder & chief investment advisor of SahajMoney.com, a financial planning firm: “Investing in NPS for retirement planning purely due to tax saving is not advised, as those tax benefits might go away in future. With the introduction of the new tax regime, our reading is that the government is testing the waters for a majority of taxpayers to move into the new tax regime, and then later on the old tax regime might be done away with. With that, the tax benefits might also go away.”

With the tax benefits gone, investment in NPS will likely become similar to investing in other secured and unsecured investments, which do not provide instant gratification through relief in tax for that year, but offer either guarantee or growth in the long term, such as fixed deposits or equity investments, respectively.

As there is no guaranteed return in NPS, many compare it with mutual funds in terms of return, but it is important to keep in mind the tax-friendly option in NPS of switching from one to the other asset class.

Kumar adds: “In the new tax regime, the taxpayers can only claim tax deduction under Sec 80CCD (2) i.e. contribution by the employer. It has reduced the benefits of investing in NPS to an extent, but for people who would not like to pay tax while rebalancing their debt and equity allocation on a regular basis, NPS is a decent option, as unlike mutual funds, one is not required to pay tax while rebalancing their portfolio by redeeming from one asset and investing into another.”

Besides the tax-free rebalancing option, the redemption amount taken in lump sum is also tax-free in NPS. Further, for people who find it difficult to invest money in a disciplined manner, NPS keeps them on track because of regular investment requirements for the long term. So, long-term lock-in until the age of 60 works in favour of subscribers in building a decent retirement corpus. It is important for people who may use their savings to spend on unnecessary impulsive expenditures.

It is important to note that if one exits from NPS before the age of 60 years, then 80 per cent of the corpus has to be mandatorily kept for buying annuity, and only 20 per cent can be withdrawn. So, it may pose some liquidity challenges if one invests only in NPS.

However, if the liquidity position is sorted out and the NPS investment remains intact, it is an option worth considering. According to Kumar, people who look forward to getting a fixed monthly income or annuity may consider NPS because it mandates buying an annuity of 40 per cent of the NPS corpus, and the remaining 60 per cent of the corpus can be withdrawn in lump sum as tax-free income.

One may choose from different asset classes, such as equity, corporate bonds, government bonds, and alternative funds for NPS investment, and also choose the fund managers. So, if not for tax benefits at the time of deposit, one may still check NPS for other benefits and include it in the retirement portfolio along with other investments.