Union Budget 2024: Financial planners wish for more tax benefits in NPS

New, balanced lifecycle scheme to be introduced under NPS

In FY16 a separate additional deduction for investment in the National Pension System (NPS) was introduced, allowing taxpayers investing up to Rs 50,000 in their NPS Tier I account to claim an additional deduction under Section 80CCD (1B) of the Income-tax Act. This deduction is unique to NPS, as  other investment avenues qualify for deductions under Section 80C alone and cannot avail of the Rs 50,000 extra benefit. However, financial planners believe that the amount allowed as deduction under NPS should be increased to further encourage retirement savings.

What is NPS?

The Union government introduced NPS to provide individuals with a pension income to support their needs in retirement. The Pension Fund Regulatory and Development Authority (PFRDA) regulates and administers NPS under the PFRDA Act, 2013.

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NPS is a market-linked defined contribution scheme available to all Indian citizens. It is mandatory for central government employees who joined service on or after January 1, 2004, except for those in the armed forces. This mandate also applies to employees of central autonomous bodies from the same date. Additionally, it is available to all state government employees and employees of state autonomous bodies if the respective state or Union territory has opted for it.

Companies can voluntarily adopt NPS for their employees. The voluntary model of NPS is available to all Indian citizens, including those residing abroad, between the ages of 18 and 70.

There are numerous benefits to investing in NPS, and most financial advisors highly recommend it for retirement planning. “NPS is a great investment option from the retirement funding standpoint,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

The benefits of NPS include being one of the cheapest investment products, offering a choice of various funds with a flexible investment pattern. This allows individuals to tailor their investments according to their preferences and risk appetite.

According to Sanjeev Govila, CEO of financial advisory firm Hum Fauji Initiatives, “NPS is a fair option for disciplined retirement savings for those who will not get any worthwhile pension from their employer or any other source, especially for those looking for a mix of equity and debt exposure.”

Also read | Which NPS annuity option should you choose?

The tax deduction

Besides being a good investment avenue, what makes NPS a must-have investment is the exclusive tax deduction it offers to investors. Employees are eligible for a tax deduction of up to 10 percent of their salary (basic + DA) under Section 80CCD(1), within the overall limit of Rs 1.5 lakh under Section 80C. Additionally, contributions up to Rs 50,000 are eligible for an extra tax benefit under Section 80CCD(1b), which is over and above the deduction available under Section 80C.

While one can invest as much as they want in NPS, tax deduction can be claimed only up to Rs 50,000 per annum.

Also read | Budget 2024-25: Standard deduction for salaried individuals may increase to Rs 1 lakh

Need for increase in tax deduction limit

Although there is an additional tax deduction of up to Rs 50,000 per annum for investment in NPS, financial planners believe that this limit is too low and should be increased to encourage people to invest more for their retirement. “The limit is insufficient considering rising living costs and longer life expectancies. Also, when converted to tax actually saved, it comes only to Rs 1,250 per month even in the highest tax bracket, which is not a sufficient enough incentive,” said Govila.

“Increase the limit to Rs 1 lakh to encourage more savings for retirement and provide better financial security for retirees,” said Govila.

Also read | Income tax: Looking for tax-savers? Here's how your employer can help you through NPS

Sadagopan believes that one should certainly not invest just because there is a tax deduction available. However, “It will be great if a separate Rs.1.5-lakh investment amount is allowed under NPS for enabling proper retirement funding. This would be a great step as there are no fallback mechanisms we have in India and retirement is self-funded,” said Sadagopan.