Interim Budget 2024: Will FM Sitharaman extend NPS benefits to new tax regime? Here's what we know

National Pension System 2024: The Centre may extend the benefits of the National Pension System (NPS) to the new tax regime, a report said on Wednesday. It is to be noted that the New Tax Regime doesn't have most tax exemptions valid under the Old Tax Regime.  CNBC Awaaz reported that the government may make an official announcement to include NPS benefits in the new tax structure, which is expected to be declared at the Interim Budget 2024 scheduled on February 1. 

The New Tax Regime is more attractive than the Old Tax System as it offers lower tax rates for respective taxpayers and HUFs. But those who opt for the new regime cannot claim several exemptions and deductions, such as HRA, LTA, 80C, 80D and more. 

To enhance the user-friendliness of the New Tax Regime, the government is considering the option of granting exemptions on NPS investments, similar to the provisions in the previous tax regime. The Pension Fund Regulatory and Development Authority (PFRDA) has reportedly proposed this amendment to the government to make the new income tax system more appealing to taxpayers.

However, under the new tax regime, taxpayers can claim the benefit of employer contributions to their NPS account under section 80CCD(2) of the Income Tax Act. This deduction is restricted to the employer's contribution to NPS made for the benefit of the employee, up to 10 per cent of the employee's salary (Basic + DA).

Last week, PFRDA Chairman Deepak Mohanty said that the pension schemes, such as the National Pension System (NPS) and Atal Pension Yojana (APY), have added 97 lakh new subscribers in 2023, taking the total subscriber base to 7.03 crore as of December 31, 2023. 

A team led by finance secretary TV Somanathan is expected to present a status report on NPS. The panel has discussed various adjustments and assurances, but it is not inclined to increase the fiscal burden or revert to the old pension scheme, the Economic Times reported. The Centre had set up the panel in April 2023 to look into the issue of pensions under the NPS for government employees.

The government may seek public input before making any decisions. The report will primarily address ways to enhance the NPS, while considering the concerns of a group of pensioners in relation to the Old Pension Scheme (OPS).

Launched in 2004, the NPS was implemented for all employees joining the central government on or after January 1, 2004, except those in the armed forces. In 2009, it extended it to all, including self-employed and employees of the unorganised sectors.  As per PFRDA, all state governments, except Tamil Nadu and West Bengal, have notified and implemented the NPS for employees.

Implementation of NPS is not just an economic reform, it has been a major issue of political debate. Debate over the NPS reached its peak after Congress-ruled states, such as Rajasthan, Chhattisgarh and Himachal Pradesh decided to go back to the Old Pension System. 

The Old Pension System (OPS) is a pension plan that provides a guaranteed fixed pension equal to 50% of the final salary after retirement. On the other hand, the National Pension Scheme (NPS) is both an investment and a pension scheme. Unlike OPS, NPS does not offer a fixed pension amount, but instead provides a long-term return as the invested amount is allocated to market securities.

In the past, the Narendra Modi-led government has stated that the previous pension scheme is not financially viable and therefore it has been discontinued. 

The Reserve Bank of India (RBI) and several economists have opposed the reintroduction of the OPS, stating that it would disrupt the fiscal equilibrium of the states. In a recent response to questions in the Rajya Sabha, the Centre clarified that there is currently no plan to reinstate the OPS for central government employees.

Also read: Pension schemes aiming to reach AUM of Rs 12 lakh cr by March-end; added 97 lakh subscribers in 2023: PFRDA chief

Also read: Income tax returns 2024: How retirement, employee provident fund benefits are taxed