The deduction under Section 80CCD(2) is set to be raised from 10% to 14% of the basic salary. This section permits you to contribute up to 10% of your basic pay to NPS tax-free. Previously, only government employees were eligible for the 14% deduction, but now this benefit has been extended to the private sector as well.
“It is proposed to increase the amount of deduction allowed to an employer in respect of his contribution to a pension scheme referred to in section 80CCD, from the extent of 10% to the extent of 14% of the salary of the employee. Further, a non-government employee in the new tax regime shall be allowed deduction of an amount not exceeding 14% of the employee’s salary in place of 10%,” the Budget speech document reads.
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For instance, if your basic salary is Rs 1 lakh, your employer can contribute Rs 10,000 (10% of basic pay) to the NPS on your behalf, which is exempt from tax. This deduction will be increased to Rs 14,000. Previously, only government employees were eligible for the 14% deduction, but it has now been extended to the private sector as well.
How much tax will you save with new NPS benefits post Budget?
As is evident from the table, if your basic pay is Rs 25,000 per month, then the additional tax saved is Rs 624. At a basic pay of Rs 1 lakh per month, the additional tax benefit is almost Rs 10,000 and at high basic pay levels of Rs 6 lakh, the extra tax saving would be over Rs 1 lakh!
Budget 2024 NPS Tax savings
Source: ET
“The NPS proposals in the budget take significant steps towards the government’s goal of making India a pensioned society by 2047,” Sriram Iyer, CEO of HDFC Pension was quoted as saying by ET.
While the new tax regime offers the NPS benefit only under Section 80CCD (2), the old tax regime allows three deductions under Sections 80CCD (1) (Rs 1.5 lakh), 80CCD (1B) (Rs 50,000) and 80CCD (2). However, the higher limit of 14% is only for those who opt for the new tax regime.
“With the employers’ contribution increasing to 14%, employees will have extended savings now. This will help in retirement planning, works as an option that is at par with the Provident Fund as per the given limits for employees, and serves an incentive to increase the tax-paying user base for the government,” says Dinesh Rohira, CEO & Founder, 5nance.com.
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The budget has also introduced a new scheme called NPS Vatsalya, which encourages long-term savings for children by their parents. Under this scheme, parents and guardians can contribute to the NPS account of minor children below the age of 18.
Once the child turns 18, the plan can be seamlessly converted into a regular NPS account. “NPS Vatsalya is a notable innovation that allows parents or guardians to contribute to a child’s pension from birth, ensuring a strong foundation for future retirement savings through compounded returns,” says Iyer.