Budget 2025: Exempt NPS annuity income from tax, allow deduction for Vatsalya scheme, say experts

Debt mutual funds are considered as short-term capital asset irrespective of holding period and are taxed at applicable rates.

Budget 2024 on July 23 made the National Pension System (NPS) more lucrative for individuals by hiking the corporate scheme deduction to up to 14 percent of an employee's basic pay under the new, minimal exemptions regime. However, the tax break was confined to salaried taxpayers.

Experts and financial planners see the upcoming Union Budget 2025 as an opportunity to address the challenges with the NPS and make it more inclusive and attractive for all investors.

“There is no tax benefit for the self-employed individuals in the new regime. So, we hope that the separate deduction limit of Rs 50,000 (section 80CCD(1B) available under the old tax regime will be incorporated in the new tax structure as well,” says Sumit Shukla, CEO, Axis Pension Fund.

He also expects the Budget to provide details on the Unified Pension Scheme’s (UPS) potential fund managers, the procedure to pay the pension and so on.

“At present, Sukanya Samriddhi Account is the only government-backed children-oriented investment scheme available to parents which enjoys tax benefits. We hope that an additional deduction will be allowed for investment in NPS Vatsalya in this Budget,” he adds.

Also read: Budget 2025 wish list: 'Relax income tax return-filing timelines for residents with foreign income'

Exempt annuity income from tax

The long lock-in period – complete withdrawal is allowed at the age of 60 years – is a key limitation.

“Lack of liquidity is a drawback in the case of NPS. While partial withdrawal is permitted, there ought to be more flexibility. At least 40 percent of the corpus has to be converted into annuities, which are taxable. The government should consider exempting annuity income from tax to encourage investment into NPS,” says Harshad Chetanwala, financial planner and co-founder, mywealthgrowth.com.

Also read: How your employer's contribution to your NPS can reduce your tax outgo

Provide an alternative to compulsory annuitisation

Compulsory annuitisation is perhaps the biggest roadblock, say financial advisors. Under NPS, subscribers get to withdraw 60 percent of their corpus tax-free, at the age of 60 years. The balance 40 percent has to be mandatorily used to purchase annuities from designated life insurance companies.

Also read: Budget 2025 live blog

“Out of your retirement corpus, a huge chunk – 40 percent – is locked away into annuities which are fully taxable. The returns, at present, are in the region of 5.5-6.5 percent. The returns would be lower than fixed deposit rates. I would rather park the amount in senior citizen savings scheme (SCSS). There should either be parity with the Employees’ Provident Fund (EPF) or investors should get an option to choose, say, systematic withdrawal or investment in a government bond over annuities,” says chartered accountant Nitesh Buddhadev, founder, Nimit Consultancy.