Allow NPS investment tax break of Rs 50,000 in new tax regime in interim budget 2024: Experts

The government wants to encourage people to move to the new tax regime which combines lower tax rates with a very limited number of exemptions. As of now, an individual’s contribution of up to Rs 50,000 to the National Pension System (NPS) under Section 80CCD (1B) as deduction under the old tax regime but not under the new tax regime. Promotion of retirement saving is also a stated goal of the government because of which the above-mentioned deduction was allowed over and above the tax saving investment limit of Rs 1.5 lakh under Section 80C in the old tax regime.

Consequently, it becomes all the more necessary to allow the tax break for NPS contribution of up to Rs 50,000 under section 80CCD (1B) also in the new tax regime, say experts. It is hoped that the interim budget 2024 would add this important and necessary exemption to those available under the new tax regime, they add. This may encourage more people to shift from the old to the new tax regime as NPS is slowly becoming popular as a retirement planning tool.

In Budget 2020, the government had introduced a concessional tax regime – called the new tax regime – with lower tax rates and varying income slabs. However, the new regime did not allow most of the commonly availed deductions and tax exemptions. Only the NPS-related deduction under Section 80CCD (2) of the Income-tax Act, 1961, was allowed under the new tax regime. This deduction is on employer’s contribution to employee’s NPS account and is available in the old tax regime also. To make the regime more attractive, the government also allowed the benefit of standard deduction from salary and pension income in the new tax regime in Budget 2023. A salaried individual opting for the new tax regime in FY 2023-24 can claim a deduction of Rs 50,000 from the gross salary income.

The Income-tax Act allows a salaried individual to claim three separate deductions on NPS investments under the old tax regime but only on employer’s contribution to employee’s NPS account in the new tax regime at present.
Here is what experts say:
Dr Suresh Surana, Founder, RSM India – business consulting group: An additional deduction of Rs, 50,000 (over and above the threshold limit of Rs 1.5 lakh under Section 80C) on contribution to NPS can be claimed by a taxpayer under Section 80CCD(1B) of the Income-tax Act. It is pertinent to note that while taxpayers opting for the old tax regime can avail the aforementioned deductions, taxpayers opting for the new tax regime cannot do so. The government may consider allowing deduction under Section 80CCD (1B) under the new tax regime for the following reasons:

• Allowing deductions for NPS contributions can incentivise taxpayers to save for retirement, promoting long-term financial planning
• NPS contributions enable in building a social security net, ensuring taxpayers have a source of income in their post-retirement years
• Encouraging contributions to NPS supports the goal of financial inclusion by providing taxpayers with a tax benefit for participating in a government-backed pension scheme

Akhil Chandna, Partner, Grant Thornton Bharat – business consulting group: The deduction under Section 80CCD(1B) was introduced to accelerate investment in NPS. As per Section 80CCD(1B), employees or self-employed can claim an additional deduction (over and above the Rs 1.5 lakh under Section 80C) of Rs 50,000 for contribution to NPS. Currently, this deduction benefit is restricted to taxpayers opting for the old tax regime and taxpayers under the new tax regime cannot avail it.

As the new tax regime is now the default tax regime, allowing deduction under 80CCD(1B) would make NPS more lucrative, and help promote retirement savings. Therefore, as the yearly finance budget is fast approaching, individual taxpayers have high expectations that the NPS deduction under section 80CCD (1B) would be introduced under the new tax regime as well.

Kurian Jose, CEO, Tata Pension Management under NPS: NPS is a superior avenue for creating a long-term pension corpus for retirement. The partial exempt-exempt-exempt (EEE) tax status of NPS may have been playing an important role in increasing its awareness and popularity. However, as per latest information available on the PFRDA website, the year-on-year (YoY) growth in NPS Assets Under Management (AUM) under the All-Citizen model until November 2023 was 32% vis-à-vis growth of 40% YoY as of November 2022.

Similarly, the growth in number of subscribers as of November 2023 has fallen to 23% YoY vis-à-vis 37% as of November 2022. This may be attributable to not allowing the Rs 50,000 deduction under NPS under Section 80CCD (1B) in the new tax regime.

This benefit under Section 80CCD (1B) was largely known and played a key role in getting individuals to invest in the NPS – whether they were employed in the organised sector or otherwise. We believe that including this exemption in the new tax regime could play a big role in popularising NPS.