Budget 2024: Make annuity income from NPS tax-free - here’s why

Budget 2024 income tax: With the Interim Budget set to be presented on February 1, tax experts are suggesting alterations to the National Pension System taxation works. One such expert wants Finance Minister Nirmala Sitharaman to explore the possibility of making annuity income from the National Pension System (NPS) tax-free. Sumit Shukla, the CEO of Axis Pension Fund, contends that according tax-free status to annuity income from the NPS aligns with principles of fairness, financial security, and social welfare.

ET quoted Shukla saying that senior citizens, who heavily rely on annuity income during retirement, could face financial strain if this income is taxed. With subscribers mandated to purchase annuities from the NPS, taxing this source of income may impede senior citizens’ ability to meet basic living expenses and maintain a decent standard of living.

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He also highlights the global trend of providing tax exemptions on annuity income, emphasizing the importance of supporting senior citizens in their retirement years.

Additionally, Shukla addresses the existing taxation on income from contributions to the Employee Provident Fund (EPF), NPS, and/or superannuation fund exceeding Rs 7.5 lakh in a financial year. This measure limits the additional savings of salaried individuals in the NPS and, consequently, restricts the potential income from annuities. To address this, he suggests either removing NPS contributions from the existing cap or increasing the limit to Rs 15 lakh.

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According to an analysis by ET, the taxation of annuity income in the NPS is a significant concern, impeding the wider acceptance of this well-designed retirement vehicle. Although the mandatory 40% annuity component in the NPS guarantees regular income during retirement, the unappealing annuity rates offered by insurers reduce its attractiveness.

However, the financial consequences of making annuities tax-free could significantly impact government finances. It is also noted that senior citizens already benefit from specific exemptions, including a Rs 50,000 exemption for interest income and a higher basic exemption.