Union Budget: The National Pension Scheme (NPS) stands out as one of the top options for building a retirement fund, boasting one of the largest subscriber bases in the country. Introduced by the Union Government in 2004 with the goal of establishing a universal pension system, the NPS initially catered to central government employees. However, it was later expanded in 2009 to include self-employed individuals and those in the private sector through corporate and all-citizen models. Over the years, the NPS has shown promising returns of 9-12%, offering investors the opportunity to diversify their portfolios across various asset classes.
Subscribers have the flexibility to actively manage their investments or choose from pre-determined portfolios. Additionally, the scheme provides tax benefits under the old tax regime, making it an attractive option for those looking to secure their financial future.
NPS under New Tax Regime
In the current scenario, contributions up to Rs 50,000 made to the National Pension System (NPS) under Section 80CCD(1B) are only eligible for deductions in the old tax regime. Unfortunately, this benefit is not applicable in the new tax regime.
It is crucial that the new tax regime also allows for tax deductions on NPS contributions up to Rs 50,000 under section 80CCD(1B) as more and more taxpayers are switching to the newer regime.
Experts emphasize the importance of including this exemption in the Union Budget 2025, alongside the existing benefits in the new tax system. This addition could encourage more individuals to transition from the old tax system to the new one, as the NPS is becoming increasingly popular for retirement planning purposes.
"In the 2024 Budget, the deduction against employer’s contribution to pension scheme u/s. 80CCD (2) has been increased to 14% of salary for private sector employers from 10%. The benefit of this amendment was made only applicable to those taxpayers who are opting for the new tax regime u/s. 115BAC. Taking cue from this latest amendment made, it is anticipated that the deduction of NPS for self-contribution may also be made available for the New Tax regime to make the scheme more attractive for tax-payers. The Government is intending to gradually transition the majority of taxpayers from the old regime to the new tax regime," said Kinjal Bhuta, Secretary, Bombay Chartered Accountants' Society (BCAS).
“There is no tax benefit for the self-employed individuals in the new regime. So, we hope that the separate deduction limit of Rs 50,000 (section 80CCD(1B) available under the old tax regime will be incorporated in the new tax structure as well,” said Sumit Shukla, CEO, Axis Pension Fund.
The 2024 Budget saw an increase in the deduction for employer contributions to pension schemes under Section 80CCD (2) from 10% to 14% of salary for private sector employers. This adjustment benefits only those taxpayers who opt for the new tax system under Section 115BAC.
Tax deductions on NPS Vatsalya
FM Sitharaman introduced NPS Vatsalya for minors in Budget 2024, which was officially launched on 18 September 2024. This scheme allows parents to make contributions on behalf of their children towards NPS, ensuring their financial security and encouraging the habit of saving for retirement from a young age.
The main goal of NPS Vatsalya is to promote long-term financial security and cultivate early retirement savings habits. Parents can open accounts for their children and contribute towards their retirement savings, fostering disciplined saving practices at an early stage.
The tax implications of NPS Vatsalya Scheme are not yet specified by the government, as the tax structure of the scheme is still pending announcement.
“At present, Sukanya Samriddhi Account is the only government-backed children-oriented investment scheme available to parents which enjoys tax benefits. We hope that an additional deduction will be allowed for investment in NPS Vatsalya in this Budget,” Sumit Shukla of Axis Pension Fund said.
"The NPS Vatsalya scheme is a pension plan for minors in India that allows parents to save for their children's future. The scheme was announced by the Finance Minister in the 2024 Union Budget. Currently, tax deductions are not allowed for contributions made in NPS Vatsalya. The noble aim of the government to secure the children's future would get a further push in case the government considers allowing taxation benefits on such contributions in the Union Budget 2025. However, as of now, one can only speculate on whether any tax benefits will be allowed in respect of NPS Vatsalya," said Yogesh Kale, Executive Director , Nangia Andersen LLP.
"The launch of the NPS Vatsalya Scheme, a minor-centric variant of the traditional NPS in the Union Budget 2024 can help in securing a child’s financial future to a large extent. However, as of now there is no clarity by the government on the tax saving opportunities in the Vatsalya scheme. Enhanced taxation policies combined with market-linked returns can bolster financial security, by making the scheme more appealing for parents through tax incentives. For instance, introduction of the tax deductions for NPS Vatsalya Scheme under the Income Tax Act, 1961 can offer dual benefits: Reduce the overall tax liability of the contributor and financial security of the child’s future," Shefali Mundra, Tax Expert- ClearTax, had told Business Today during the launch.