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Budget 2024: Why Additional Deductions for NPS should be Increased?
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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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 1st 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:
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:
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.
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