Budget 2024 has made NPS more attractive in the new tax regime. Contributions made by the employer to the employee’s NPS Tier-I account can now be claimed as a deduction of up to 14%. This change will strengthen social security and help taxpayers save more.
National Pension Scheme (NPS) is becoming popular day by day. Earlier, government sector employees joined it. Now private sector employees are also joining it. Earlier, the limit of employer’s contribution for government sector employees was increased from 10 percent to 14 percent. Now the benefit of this facility has been given to private sector employees as well. Let’s know about this in detail.
What has changed
The government has increased the tax benefit for those investing in NPS. Now the limit of employer’s contribution to NPS for private sector employees has been increased from 10% to 14%. This means that now a larger part of your salary will go to NPS tax free and your retirement fund will become even stronger.
Who will get the benefit
There is one thing to keep in mind here. This benefit will be available only to those who choose the new tax system. Those who choose the old regime will not get any benefit from it. Before this change, this facility was available only to government employees. This time, the facility of Vatsalya account has also been provided for children.
What is NPS Vatsalya
In this scheme, parents or legal guardians will be able to make contributions for minors. When the minor becomes an adult, the scheme can be converted into a normal NPS account. When the child becomes an adult, this scheme can be easily converted into a normal NPS account.
What is NPS?
NPS stands for National Pension System. It is a pension scheme launched by the Government of India. This scheme is specially designed for unorganized sector employees and self-employed individuals. However, this scheme is open to all Indian citizens. When you invest in NPS, you get two accounts – Tier 1 and Tier 2.
What are Tier 1 and Tier 2 accounts
- Tier 1 Account: This is a retirement account. You cannot withdraw the amount deposited in this account before the age of 60.
- Tier 2 Account: This is a voluntary savings account. You can withdraw the amount deposited in this account at any time.
What are the benefits of investing in NPS?
There are many benefits of investing in NPS, such as:
- Tax benefits: Investing in NPS gives you tax benefits under Section 80CCD of the Income Tax Act.
- Investment options: NPS gives you the option to invest in different asset classes such as equity, government bonds and corporate bonds.
- Low cost: NPS is a low-cost pension plan.
Portability: NPS is a portable pension plan. You can transfer your NPS account with you even if you change jobs.
Tax benefits in NPS
As per the current income tax laws, the tax benefits available on investing in the National Pension System (NPS) depend on the tax regime chosen by the taxpayer in the respective financial year. The old tax regime allows three deductions under the Income Tax Act, 1961. All the three deductions can be claimed under sections 80CCD (1), 80CCD (1B) and 80CCD (2). The new tax regime allows only one deduction under the Income Tax Act, 1961, which is the deduction under section 80CCD (2).
How much deduction benefit do you get
Here is a look at these three deductions as per the current income tax laws:
- Section 80CCD (1): This section allows a maximum deduction of 10% of salary or ₹1.5 lakh (whichever is lower) for investments made in NPS Tier-1 in a financial year. It is important to note that this deduction falls within the overall limit of ₹1.5 lakh allowed under Section 80C. So, if you invest up to ₹1.5 lakh in other eligible investment options (such as ELSS mutual funds, PPF, EPF, etc.) under Section 80C, you cannot claim additional deduction for any amount invested in NPS under Section 80CCD (1). This deduction is available only under the old tax regime.
- Section 80CCD (1B): This section provides an additional deduction of up to ₹50,000 over and above the Section 80C deduction. To claim this deduction, an individual must invest in an NPS Tier-1 account. This deduction is available only under the old tax regime.
- Section 80CCD (2): This deduction is available under both tax regimes – old and new. This deduction can be claimed when the employer deposits money in the employee’s Tier-1 NPS account. A maximum of 10% of the gross taxable income is allowed as salary deduction under this section.
- However, note that if an employer’s contribution to NPS, Employees’ Provident Fund and Superannuation Fund exceeds ₹7.5 lakh in a financial year, the excess amount will be taxable in the hands of the employee. In addition, interest earned on the excess contribution will also be taxable.
- Therefore, an individual can use NPS to claim a maximum deduction of up to ₹9.5 lakh from gross taxable income through three routes under the old tax regime – Section 80CCD (1) (maximum ₹1.5 lakh); Section 80CCD(1B) (₹50,000) and Section 80CCD (2) (maximum ₹7.5 lakh). On the other hand, in the new tax regime, a person can use NPS to claim deductions of up to ₹7.5 lakh only under Section 80CCD (2) of the Income Tax Act.
- All the deductions mentioned above are claimed from the gross total income.
Tax on withdrawal from NPS account
At the time of withdrawal, an individual is mandatorily required to use at least 40% of the NPS corpus to buy an annuity (pension) plan from an insurance company. The remaining, which can be a maximum of 60%, can be withdrawn as a lump sum.
The lump sum is exempt from income tax. However, the annuity is taxable in the hands of the NPS investor. The annuity is taxable under the head “Income from other sources”. Since the pension is received from life insurance companies, the standard deduction tax benefit is not available on this pension.
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