Budget 2024: Highlights & Latest News on Increased NPS Deductions

Home

Services

Products

Help

Get App

The salaried class individuals are always on the lookout to ease their tax burdens. That is why NPS (National Pension System) is one of the most sought-after retirement plans that lets them save money for retirement and reduce taxes simultaneously.

Tax exemption is one of the significant benefits NPS subscribers enjoy. Increasing the NPS-related tax exemptions might make the scheme more popular among investors and offer better benefits to the subscribers. However, in the interim budget 2024 announced on 1^st February, the Finance Minister made no alterations to the NPS. Here's an overview.

Current Scenario of NPS Deductions

The introduction of a Rs 50,000 deduction in NPS investment under Section 80CCD (1B) significantly increased the number of individuals subscribing to the National Pension System. As the Finance Minister was about to announce Budget 2024, people expected increasing this additional deduction to around Rs 1 Lakh in both regimes to make the scheme more attractive.

For instance, if an NPS subscriber invests an amount of Rs 50,000 annually, they accumulate Rs 47 Lakh in 25 years. With a compounded return rate of 9%, they receive a monthly pension of Rs 23,528. Considering the 6% inflation rate, this pension amount will only be worth Rs 5,300, which is quite low for subscribers to lead a comfortable life. Increasing the deduction to Rs 1 Lakh will better incentivise the subscribers by letting them save more for their golden years.

Importance of NPS in Retirement Planning

To ensure financial security, the NPS scheme provides subscribers with lump sum benefits and annuity payouts after retirement. Here are some long-term NPS benefits for individuals:

Flexibility: The scheme allows subscribers to change their investment options to gain better returns. They can also choose their investment amount, along with options for partial withdrawals when necessary.
Diversification: Since NPS divides investments across equity and debt, investors can earn market-linked returns without losing stability.
Simplicity: Opening an NPS account allocates a Permanent Retirement Account Number to the subscriber, a unique number that remains throughout the lifetime.
Portability: NPS benefits continue even when the subscriber shifts to a new location or changes jobs.
Regulatory Compliance: The Pension Fund Regulatory and Development Authority (PFRDA) regulates NPS with transparent norms, performance reviews, and regular monitoring.
Compounding Power: The scheme offers compounding benefits for wealth accumulation.
Tax Benefits: Currently, subscribers can claim tax benefits of up to Rs 2 Lakh under Section 80CCD(1), 80CCD(1B) and 80CCD(2).

All these long-term NPS benefits make the scheme attractive to investors, encouraging more individuals to plan for retirement. Consequently, it aligns with the government's retirement planning goals to secure everyone’s future.

Economic and Social Impact

Since the scheme spreads investments across various asset classes, including equity and debt, it strengthens capital markets with regular contributions. By investing in NPS, subscribers can save enough for their retirement to reduce their future pension liabilities. As a result, the scheme mitigates old-age dependency on social welfare and family members.

Rationale for Increasing NPS Deductions

The primary reason to increase NPS deductions is to incentivise subscribers with higher long-term savings. Those working in the private sector can receive a higher pension after retirement, enabling them to lead a comfortable life of self-reliance without depending on others. Increasing the tax exemption also addresses inflationary pressures on their retirement income by letting them accumulate more.

Comparative Analysis

Compared to other investment avenues, NPS offers better benefits and tax exemptions. For instance, interest accrued and maturity amount in a PPF account are tax exempted. Fixed deposits (FDs) are taxable, excluding tax-saving FDs. Other international best practices in pension planning include the following:

International Pension Plans (IPPs)
International Savings Plans (ISPs)
Defined Contribution (DC) Plans
Defined Benefit (DB) Plans

With enhanced NPS deductions, these countries have witnessed a surge in people investing in these plans to achieve financial security.

Potential Benefits for Taxpayers

With increased NPS deductions, taxpayers can have more disposable income to lead a comfortable retirement. They gain more comfort and independence with financial literacy and inclusion. As a result, the younger generation also finds good reasons to invest in NPS and secure their future.

Addressing Concerns and Challenges

Enhanced NPS investments due to increased deductions will potentially impact the revenue to the government and capital markets. Regular NPS contributions also inculcate the habit of saving and financial responsibility among citizens. Since the PFRDA regulates NPS investments, they have almost no risk of misuse or abuse.

Expert Opinions and Stakeholder Perspectives

According to financial analysts, increasing the deduction will encourage people to opt for the new tax regime that the government introduced in 2020. While the new tax regime did not provide any other tax exemptions and deductions, the NPS-related deduction is already present in the regime under Section 80CCD(2). However, salaried individuals can claim three separate tax deductions under the old tax regime for NPS but only on the employer’s contribution under the new tax regime. Tax professionals and economists estimate that the increased tax exemptions will motivate people to shift to the new tax regime and choose NPS as an effective retirement planning instrument.

Legislative and Administrative Considerations

Tax professionals and economists proposed amending the tax legislation to increase the tax deductions for NPS investments. NPS managers and administrators expected a positive announcement in the 2024 budget. However, the interim budget 2024 did not make any such announcement.

Public Awareness and Education

To encourage taxpayers for NPS investments, the government needs to run effective campaigns to increase awareness about the scheme’s benefits. In the case of increased NPS deductions, people should also be aware of it to increase NPS investments. Effective campaigning will foster public support for the proposal and generate positive results in future budget announcements.

Conclusion

Although increased NPS deductions are not a part of the interim budget 2024, policymakers should consider the proposal benefits before finalising their decision. Considering the economists’ proposal for increasing NPS deductions, the future of NPS seems bright and favourable. Apart from increasing the subscribers’ scheme benefits, the step will also encourage retirement planning in the country.