Opting for the new tax regime? Here’s how you can increase your tax savings

Should you opt for corporate NPS?

The Budget's boost to the National Pension System (NPS) will help salaried individuals in the middle income brackets net big savings.

That is, if they opt for the new tax regime and sign up for corporate NPS, through which their employers will contribute up to 14 percent of their basic salaries to their NPS accounts. Under the old tax regime, this limit is unchanged at 10 percent.

For non-government employees, NPS is a voluntary scheme; they can contribute on their own through the all-citizens’-model as also under the corporate NPS scheme with some help from their employers.

Tax concession under the new tax regime

At present, employees are eligible for deduction of up to 10 percent of their basic pay (and dearness allowance, if any) on own NPS contributions under section 80CCE. This contribution cannot exceed the overall section 80C limit of Rs 1.5 lakh. If they choose the old regime, they can contribute another Rs 50,000 and claim deduction under section 80CCD(1B).

This apart, if your employer contributes up to 10 percent of your basic salary (and dearness allowance, if any) to your NPS account, you get a deduction under section 80CCD(2) – this is applicable to the old as well as new tax regimes at the moment. The employer, too, can claim deduction on the contribution, as it is treated as a business expense.

As of May 31, 2024, corporate NPS scheme’s subscriber base stood at 20.16 lakh; its year-on-year growth has been slower than that of the all-citizens-model (20.74 percent) and Atal Pension Yojana (APY), the other two voluntary plans.

Budget 2024 has proposed that the deduction on employers’ NPS contribution be hiked to 14 percent for salaried tax-payers choosing the new regime. The government intention to incentivise the new tax structure has been clear for a while.

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

To opt for corporate NPS or not

The question is, should you avail of the facility if your employer offers the same? The tax math does work out in favour of corporate NPS in some income brackets. For example, Taxmann’s calculations show that if a salaried individual with a gross annual salary of Rs 8,20,975 (basic pay of Rs 3,28,390, which is assumed to be 40 percent of the gross salary) opts for the new tax regime as well as 14 percent corporate NPS (employers’ contribution of Rs 50,424), she will not have to pay any tax (see graphic).

On the other hand, to reach zero-tax levels under the old tax regime, she will have to claim total deductions of at least Rs 2,38,136, besides standard deduction of Rs 50,000 and employers’ NPS contribution of 10 percent. This is because the income limit for rebate under section 87A is lower at Rs 5 lakh in case of the old regime. The standard deduction, too, remains unchanged at Rs 50,000.

If your deductions are higher than the ‘equaliser’ figure or break-even point (see graphic), you will save more tax under the old regime.  For instance, if your gross salary is Rs 30 lakh (basic salary of Rs 12 lakh) and you claim total deductions of over Rs 5,31,330 (including standard deduction of Rs 50,000), you will save more tax under the old regime. In this case, your employees’ provident fund (EPF) contribution will nearly exhaust the Rs 1.5 lakh limit under section 80C.

If you are paying health insurance premiums for yourself and senior citizen parents, you can claim deductions of Rs 75,000 under section 80D. In addition, own NPS contribution of Rs 50,000 that is eligible for deduction under section 80CCD(1B), home loan interest of Rs 2 lakh (alternatively, house rent allowance) and tax breaks worth Rs 7,000 on donations made during the year will help you breach the equaliser limit. If your HRA is significantly higher, the old regime will yield more tax savings.

If your deductions cannot breach the break-even levels (see graphic), however, you are better off under the new tax regime.

Also read: Old vs new tax regime: How to take the right pick 

High incomes call for careful tax optimisation

Those in the higher income brackets, too, can benefit from corporate NPS. However, they need to work with their employer and HR teams structure their salary package meticulously to maximise tax benefits.

As per tax laws, if employers’ total contribution towards employees’ retirement benefits is higher than Rs 7.5 lakh per annum, the excess amount is subject to tax. “This includes employers’ provident fund contribution of 12 percent, NPS contribution (10 percent or 14 percent, depending on the tax regime chosen) and superannuation benefits,” says Tivesh Shah, Founder, Tru-Worth Finsultants.

“If your gross salary is higher than Rs 72,11,538 (assuming basic pay of 40 percent or Rs 28,84,615), the capping of Rs 7.5 lakh on employers’ contribution will come into play. Beyond this threshold, the excess contribution will attract tax at slab rates,” says Naveen Wadhwa, Vice-President, Taxmann.

So, senior employees with hefty salaries will not be able to enjoy unfettered, tax-free employers’ contribution. “It is legally possible for such individuals to limit employers’ contribution to their NPS in such a manner that the yearly contribution does not exceed Rs 7.5 lakh. But practically, it may not be easy for an organisation to allow flexibility to this extent as it will lead to administration hassles. Depending on the organisation, however, it can offer a specific (lower) rate to certain grades of employees, particularly senior management, so that they can optimise the tax breaks,” says Kuldip Kumar, Partner, Mainstay Tax Advisors.

Financial planners say that while NPS deserves a place in your retirement portfolio, you should not rely on this product alone. “The mandatory 40 percent annuitisation is a limitation, particularly because pension income is taxed at slab rates. You should have a diversified retirement portfolio with equity mutual funds for wealth creation,” says Shah.