NPS gets more attractive under new tax regime: Finance Minister Nirmala Sitharaman has announced a new tax regime and a plan to promote the National Pension System (NPS) through the budget.Another important step has been taken. The Finance Minister has proposed in the budget that the limit of investment made in NPS through the employer for private sector employees should be increased. Till now, private sector employees could invest a maximum of 10% of their basic salary in NPS through the employer. But now it is proposed to increase this limit to 14%. This increased benefit will be available only to those private sector employees who will adopt the new tax regime. Government employees already have the facility to invest up to 14% in NPS.
What are the current income tax rules
In fact, under the current rules of Income Tax, employees working in the private sector are allowed to invest up to 10% of their basic salary in NPS under Section 80CCD (2) of the Income Tax Act. But this investment can be made only through the employer. For example, if your basic salary is Rs 1 lakh, then your company can contribute Rs 10,000 (10% of basic salary) to NPS on your behalf, which will be tax-free. After the implementation of the proposal presented in the budget, this limit will increase to Rs 14,000 for employees adopting the new regime.
Also read: Tax: Income Tax Department claims, there will be benefit from the new LTCG rule on property sale, calculation also given
What will be the benefit of the budget proposal?
Under Section 80CCD(2) of the Income Tax Act, the limit for private sector employees to avail tax benefits by contributing to NPS will be increased. This section allows your employer to make contributions to your NPS account on your behalf, and this amount is tax-free for you.
What is the big change?
Earlier, the limit for tax-free contribution was equal to 10% of your basic salary. Now, it has been increased to 14% for those opting for the new tax regime.
How can you benefit?
Suppose your basic salary is Rs 1,00,000 per month.
-
Under the old rules, your employer could make a tax-free contribution of up to ₹10,000 (10% of ₹1,00,000) to your NPS account.
-
Under the new rules, this tax-free contribution can go up to ₹14,000 (14% of ₹1,00,000).
Who will get the benefit?
After this change, private sector employees will also get the benefit of investing up to 14% in NPS. Earlier, this benefit was available only to government employees. However, it is important to note that the higher limit of 14% will be applicable only if you choose the new tax regime.
Also read: New Income Tax Slabs: Big change in income tax slab, check the new rates of new tax regime, how much tax will be levied on how much income now
Why is the new proposal important?
1. The increased contribution limit means that you can now save more for your retirement without paying tax on that amount.
2. With the exemption of 14% investment in NPS, this scheme can become an alternative to old schemes like Provident Fund.
3. Salaried people will get an opportunity to save tax in a legal manner, which can be expected to promote compliance with the rules.
Also read: LTCG Tax Rule Change: How will the tax burden increase on selling property, understand the loss of ending indexation benefit with the help of calculation
What is the benefit of NPS in the old tax regime?
Although the benefit of increasing the tax-free investment limit of NPS in the budget proposal is only for the new tax regime, if you stick to the old tax regime, you can still avail the benefits of NPS under different sections:
- Section 80CCD(1): Deduction up to ₹1.5 lakh
- Section 80CCD(1B): Additional deduction of ₹50,000
- Section 80CCD(2): Employer’s contribution (10% of basic salary)
Also read : Pension: Do you invest in NPS Tier 1 for pension? Where is your money going, how much return are you getting
NPS Vatsalya: New scheme for children
The government has also launched a new scheme called NPS Vatsalya. It allows parents to open NPS accounts for children below the age of 18. Once the child turns 18, this account can be easily converted into a regular NPS account.
Why is NPS Vatsalya important?
1. Importance of starting the investment journey early: It allows parents to start retirement planning for their children from a very young age.
2. The magic of compounding: Starting early means the investment gets more time to grow through compound interest.
3. Financial Literacy: It can help teach children about the importance of long term savings from an early age.
These changes in NPS have been made with the aim of promoting the habit of long-term savings and increasing the number of people with pension coverage in the country by 2047. By making NPS more attractive and offering options for children, the government is encouraging people of all ages to join the retirement plan.
