New NPS Budget 2024 Benefits Explained: In the Budget 2024, the government has announced significant changes to the National Pension System (NPS) contributions, allowing for greater tax savings. The contribution limit for employers in the private sector has been raised from 10% to 14% of the employee's basic salary. This new limit applies to both private and public sector employees, exclusively under the new tax regime. Shalini Jain, Tax Partner, People Advisory Services at EY India, emphasises that this increase will enable employees opting for the new tax regime to save more taxes and build a larger pension pool for social security.
Enhanced employer contributions
According to an ET report, the Finance Minister, Nirmala Sitharaman, highlighted in her Budget 2024 speech that the deduction for employers' contributions towards NPS will be increased from 10% to 14% of the employee’s salary. This deduction applies to employees in the private sector, public sector banks, and undertakings who opt for the new tax regime.
Tax benefits on NPS investments
The tax benefits on investing in NPS depend on the tax regime chosen by the taxpayer in the relevant financial year. Under the current income tax laws, the old tax regime allows for three deductions under the Income-tax Act, 1961, while the new tax regime allows only one deduction.
Deductions under the old tax regime
Section 80CCD (1):
- Eligibility: Available for investments in NPS Tier-I.
- Maximum Deduction: 10% of salary or Rs 1.5 lakh (whichever is lower).
- Note: This deduction is part of the overall Rs 1.5 lakh limit under Section 80C. If you invest Rs 1.5 lakh in other eligible avenues under Section 80C, you cannot claim additional deductions for NPS under this section.
Section 80CCD (1B):
- Eligibility: Available for investments in NPS Tier-I.
- Maximum Deduction: An additional Rs 50,000 over the Section 80C deduction.
- Note: This deduction is available only under the old tax regime.
Section 80CCD (2):
- Eligibility: Available for employer contributions to the employee’s Tier-I NPS account.
- Maximum Deduction: Up to 10% of salary.
- Note: This deduction is available under both the old and new tax regimes.
Tax benefits under the new tax regime
Section 80CCD (2):
- Eligibility: Available for employer contributions to the employee’s Tier-I NPS account.
- Maximum Deduction: Up to 14% of salary for private sector employees and government employees.
- Cap: The combined employer contributions to NPS, Employees’ Provident Fund, and superannuation fund are capped at Rs 7.5 lakh in a financial year. Any excess is taxable, and the interest earned on excess contributions is also taxable.
Maximising tax deductions
Under the old tax regime, an individual can claim up to Rs 9.5 lakh in deductions through three routes:
- Section 80CCD (1): Maximum Rs 1.5 lakh
- Section 80CCD (1B): Rs 50,000
- Section 80CCD (2): Maximum Rs 7.5 lakh
Under the new tax regime, an individual can claim a deduction of up to Rs 7.5 lakh under Section 80CCD (2).
Income tax on NPS withdrawals
Upon withdrawal, an individual must use at least 40% of the NPS corpus to purchase an annuity plan from an insurance company. The remaining 60% can be withdrawn as a lump sum.
- Lump sum withdrawal: Exempt from income tax
- Annuity: Taxable under the head “Income from other sources”. The pension received from life insurance companies does not qualify for the standard deduction tax benefit.
Recent PFRDA announcements
On October 27, 2023, the Pension Fund Regulatory and Development Authority (PFRDA) announced that NPS subscribers can withdraw up to 60% of their pension corpus via a systematic lump sum withdrawal (SLW) method. Subscribers can withdraw the lump sum in a phased manner (monthly, quarterly, half-yearly, or annually) up to the age of 75 years.
However, there is still a lack of clarity among tax experts regarding the tax-free status of money withdrawn via the SLW method.
On January 12, 2024, the PFRDA issued a master circular on partial withdrawals from the NPS Tier-I account. Partial withdrawals are allowed for specific reasons such as:
- Higher education or marriage of children (including legally adopted).
- Purchase or construction of a residential house or flat in the subscriber's name or jointly with their legally wedded spouse.
Other conditions for partial withdrawal include:
- Up to 25% of the subscriber’s contribution (excluding employer’s contribution).
- The subscriber must have been a member of NPS for at least three years.
- A maximum of three partial withdrawals are allowed until the maturity of the NPS account.
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