NPS tax breaks: After tax tweaks in Union Budget 2024, which tax regime will give you more benefits under NPS

National Pension System: This year in the Budget, Finance Minister Nirmala Sitharaman brought in many tax changes in the existing structure that would affect all taxpayers. She brought in major change to the Capital Gains Tax regime affecting all asset classes. On the other hand, the Budget proposed liberalised tax slabs and rates, and hiked the standard deduction limit to Rs 75,000 under the new, concessional tax regime.

One of the measures proposed for the salaried taxpayers was the increased deduction limit on employers’ contribution to employees’ National Pension System (NPS) from 10% to 14%, which is valid only under the New Tax Regime. 

After the Union Budget 2024, the new tax regime, which is now the default tax-filing regime, has been simplified further but it will continue to offer fewer deductions compared to the Old Tax Regime. The previous regime, although still available, is no longer the default option and provides multiple deduction opportunities. It is crucial for taxpayers to analyse which regime best aligns with their financial objectives and maximizes their benefits. 

In terms of NPS, tax benefits are available under both old and new tax regimes in India. NPS taxation differed from the Old Tax Regime and New Tax Regime. Under the old tax regime, NPS offers tax benefits under three sections of the Income Tax Act, 1961. 

NPS additions under New Tax Regime (Budget 2024-25)

Employees opting for the New Tax Regime are now entitled to a larger deduction of up to 14% of their basic salary for the contributions made by the employer towards the NPS on behalf of the employee under Section 80CCD(2) of the Income Tax Act. This change was introduced in the Union Budget 2024, which outlined a substantial rise in the deductible amount for employer contributions to employees' NPS.

The deduction rate applicable to employees' basic salary has recently been increased from 10% to 14%. This new deduction rate will be applied to both public-sector companies and private-sector entities under the revised regime.

It is important to highlight that government employees currently enjoy a 14% deduction on their NPS contributions. This enhanced deduction is governed by Section 80CCD(2) of the Income Tax Act and is eligible for both the existing and the newly simplified tax structures. However, the heightened 14% deduction rate will exclusively be in effect under the newly introduced simplified tax system.

Existing Provision

Proposed Revision

(1) Section 80CCD deals with deduction in respect of contributions to the pension scheme of the Central Government. Sub-section (2) of section 80CCD states that any contribution by the Central Government or State Government or any other employer to the account of an employee, shall be allowed as a deduction as does not exceed: (a) 14% (where such contribution is made by the Central Government or State Government); and (b) 10% (where such contribution is made by any other employer) of the employees’ salary in the financial year.

An amendment in section 80CCD of the IT Act is proposed to provide that the employee shall also be eligible to claim higher deduction of up to 14% instead of 10% of salary if he opts for the new tax regime as per section 115BAC(1A) of the IT Act

CA (Dr.) Suresh Surana told Business Today: Given the recent amendments to the National Pension System (NPS) provisions in the budget, the attractiveness of the Old Tax Regime versus the New Tax Regime might be evaluated as follows:

> The Old Tax Regime allows for a range of deductions and exemptions including deductions for both employer’s as well as employee’s contribution to NPS. It still offers advantage of a broader range of tax-saving instruments.

On the other head, the Concessional/ New tax regime provides for concessional tax rates with restrictions on claiming various deductions and exemptions.

However, it is pertinent to note that deduction w.r.t. employer’s contribution to NPS u/s 80CCD(2) is provided under both such regimes, however, the higher deduction of 14% (as against 10%) can be only claimed by taxpayers opting for the concessional (New) tax regime.

"With the revised provisions allowing a 14% NPS deduction under the New Tax Regime, the attractiveness of the new regime has increased, especially if taxpayers favour a simplified tax process without the need to claim multiple deductions. The higher NPS deduction aligns the new regime more closely with the benefits previously available under the old regime. However, if a taxpayer has significant deductions and prefer to leverage them (including the full NPS deduction), the old tax regime might still be more attractive," Surana added. 

Which tax regime will be suitable?

Surana said the decision on which tax regime is more attractive post-budget depends on the taxpayer’s individual financial situation.

"If they prefer maximizing deductions and have other eligible expenses, the Old Tax Regime may be beneficial. However, if taxpayers value a simplified tax process and can benefit from the higher NPS deduction in the New Tax Regime, then the new regime could be more appealing. Please note that this amendment is effective from Financial Year 2024-25," he added. 

NPS under Old Tax Regime

Taxpayers opting for the Old Tax Regime have the opportunity to claim tax deductions for contributions to the NPS under three different sections of the Income-tax Act, 1961: Sections 80CCD (1), 80CCD (1B), and 80CCD (2).

Under the Old Tax Regime, Section 80CCD (1) of the Income-tax Act, 1961 allows for a deduction from taxpayers' gross total income for NPS contributions. Both salaried and self-employed individuals can benefit from this deduction. The maximum deduction permitted under Section 80CCD(1) is 10% of the salary (Basic + DA) for salaried employees and 20% of the gross total income for self-employed individuals, with an upper limit of Rs 1.5 lakh in a financial year.

It is important to remember that the total deductions under Section 80C, Section 80CCC, and Section 80CCD cannot exceed Rs 1.5 lakh.

Furthermore, Section 80CCD (1B) provides an additional deduction of up to Rs 50,000 for NPS contributions, which is in addition to the Rs 1.5 lakh limit available under Section 80CCD (1).

Section 80CCD (2) specifically applies to the employer's contribution towards an employee's NPS account. 

Consequently, this benefit is exclusively accessible to salaried taxpayers.  Employees in the private sector may have the opportunity to modify their salary structure to include employer contributions to the National Pension System (NPS), which are deducted from their overall cost-to-company (CTC) package.