NPS tax deduction : Budget 2024 has introduced significant changes to the National Pension System (NPS), aiming to make it more attractive and beneficial for private sector employees. One of the most notable changes is the increase in the tax deduction limit on the employer’s contribution to NPS, which has been raised from 10% to 14% of the basic salary. This adjustment brings private sector employees on par with their government counterparts, who already enjoyed a 14% deduction.
For example, if an employee’s basic salary is ₹1 lakh, the eligible deduction under the previous rule would have been ₹10,000. With the new changes, this amount increases to ₹14,000, offering a greater tax-saving opportunity. However, it is important to note that this enhanced benefit is available only to those opting for the new tax regime.
How will NPS help in saving taxes?
| Monthly Basic Pay | Annual NPS Contribution (Existing) | Tax Saved (Existing) | Annual NPS Contribution (Proposed) | Tax Saved (Proposed) | Additional Tax Saved |
| ₹25,000 | ₹30,000 | ₹1,560 | ₹42,000 | ₹2,184 | ₹624 |
| ₹50,000 | ₹60,000 | ₹6,240 | ₹84,000 | ₹8,736 | ₹2,496 |
| ₹1,00,000 | ₹1,20,000 | ₹24,960 | ₹1,68,000 | ₹34,944 | ₹9,984 |
| ₹3,00,000 | ₹3,60,000 | ₹1,23,552 | ₹5,04,000 | ₹1,72,973 | ₹49,421 |
| ₹6,00,000 | ₹7,20,000 | ₹2,58,336 | ₹10,08,000 | ₹3,61,670 | ₹1,03,334 |
This move is expected to have several positive effects. Firstly, it increases the tax savings for employees, allowing them to retain more of their income. Secondly, it helps in building a more substantial retirement corpus, as the increased contribution will compound over time. Lastly, the enhancement in tax benefits aims to increase the penetration and visibility of the NPS, particularly among private sector employees who may not be fully aware of the scheme.
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Addressing the challenges and perceptions
Despite these positive changes, some challenges remain. The Employee Provident Fund (EPF) is often seen as the default retirement savings option, with its mandatory 12% contribution potentially overshadowing the NPS. Many employees question the need to contribute further to the NPS, as it may reduce their take-home salary. However, experts argue that the NPS and EPF are not mutually exclusive. Contributing to both can significantly enhance retirement savings, with the NPS offering potentially higher returns through market-linked options.
Another concern is the lack of awareness and education about the NPS among corporate employees. While the increased tax deduction is a positive step, experts emphasise the need for better education and awareness programs. She notes that even senior corporate employees are often unaware of the benefits of the NPS, suggesting that more needs to be done to promote this scheme.
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NPS Vatsalya
In an innovative move, Budget 2024 also introduced the NPS Vatsalya scheme, aimed at encouraging parents and guardians to start saving for their children’s retirement early. This scheme allows contributions to be made on behalf of minors, which can be converted to a regular NPS account once the child reaches adulthood.
The concept behind NPS Vatsalya is to provide a long-term compounding benefit, starting early in a child’s life. For instance, if contributions begin when the child is 10 years old, the accumulated amount can form a solid foundation by the time the child starts working. However, the scheme has received mixed reactions. While it offers long-term benefits, the lock-in period and restrictions on withdrawals may limit its appeal, especially given the high inflation rates in education costs. Some experts suggest that the scheme could be more attractive if it allowed withdrawals for specific needs like education.
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Final thought
Overall, the changes in Budget 2024 reflect a clear intent to promote long-term savings and provide a more equitable tax structure for retirement planning. The increased tax deductions and the introduction of NPS Vatsalya are commendable steps towards encouraging a savings culture among Indian employees. However, for these initiatives to be truly successful, it is crucial to address the existing challenges, such as awareness and flexibility in withdrawal options.
As the government continues to refine these schemes, it remains to be seen how they will be received by the public. For now, these changes mark a significant step towards a more inclusive and robust retirement planning framework in India.
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