Budget 2025: Should you shift to Old Tax Regime for your investment under National Pension System? 

NPS: The National Pension Scheme (NPS) is recognised as a premier choice for creating a retirement fund, with one of the highest numbers of subscribers nationwide. The NPS has garnered popularity over the years, especially among private sector employees who had limited retirement savings options. Additionally, the NPS is recognized as one of the exemptions under the New Tax Regime.

Initially launched in 2004 for government employees, the scheme was later expanded to include all individuals, including private sector workers and self-employed individuals. However, the investment regulations and benefits under the NPS vary slightly for government employees compared to others. Through the years, the NPS has demonstrated potential returns ranging from 9-12%, providing investors with the chance to diversify their portfolios through a range of asset classes.

One notable feature of the NPS is its tax-exempt status, falling under the EEE (Exempt-Exempt-Exempt) category. This means that contributions made to the NPS, the returns earned during the investment period, and the final withdrawals are all exempt from taxation under the Old Tax Regime.

However, certain tax benefits for NPS are also available under the New Tax Regime.

NPS under Old Tax Regime

Employees who contribute to the NPS under the old tax system are entitled to a tax deduction of up to 10% of their salary (Basic + DA), with a maximum limit of Rs 1.5 lakh under Section 80CCE. 

Moreover, Section 80CCD(1B) allows for an additional tax deduction of up to Rs 50,000, which exceeds the Rs 1.5 lakh threshold. It is important to note that there is no upper limit for NPS investments.

In the Old Tax Regime, Section 80CCD(2) allows for up to 10% of the employee's basic salary to be tax-free when invested in a pension scheme. This limit increases to 14% for taxpayers under the new tax regime. However, given the lack of NPS benefits provided by private sector employers, this higher limit may not be applicable to many employees.

NPS benefits under New Tax Regime

In the 2024 Budget, the deduction for employer contributions to pension schemes under section 80CCD (2) has been increased to 14% of salary for private sector employers, up from 10%. This adjustment specifically pertains to taxpayers who opt for the new tax regime under section 115BAC.

In the New Tax regime, only employer contributions covered by Section 80CCD (2) qualify for tax benefits. Unfortunately, many private sector employees do not receive any NPS benefits from their employer, making this provision ineffective for them.

Under Section 80CCD (2) in the Old Tax Regime, a maximum of 10% of the employee’s basic salary contributed to the pension scheme is tax exempt. For taxpayers who have chosen the new tax regime, this threshold is raised to 14%. However, as previously noted, private sector employers typically do not provide NPS benefits to their employees.

Should you change your investment strategy for NPS?

Under the New Tax Regime, NPS account holders don't enjoy the same tax advantages as they did under the Old Tax Regime. This shift has prompted many to question the continued viability of investing in NPS. Without the tax deductions, some may perceive the returns from NPS, typically around 10% with a growing debt allocation as the account matures, as less appealing. This raises concerns about whether alternatives such as mutual funds, offering potentially higher returns, may be more suitable for those aiming to maximize their investments.

It is evident that individuals investing in NPS and utilising the full Rs 2 lakh limit under Sections 80CCE and 80CCD(1B) would benefit more by remaining under the Old Tax Regime.

Apart from the tax advantages provided by the NPS, the Old Tax Regime also includes additional deductions under Section 80C and Section 24B, making it a compelling choice for individuals aiming to maximize their savings.

Budget 2025 expectations

Ahead of the Union Budget 2025-26, there is optimism that the government will consider introducing further income tax benefits related to the National Pension System (NPS) in the updated tax framework. Presently, under the existing tax structure, individuals can avail an additional tax deduction of up to Rs 50,000 on voluntary NPS contributions. 

A recent pre-budget survey conducted by Grant Thornton Bharat revealed that 27% of respondents are advocating for more flexible withdrawal regulations for NPS, while 20% are seeking increased tax exemptions on NPS. A majority of 53% of taxpayers are in favor of both these proposed changes being implemented in the upcoming budget for the fiscal year 2025-26.

"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).