The National Pension System (NPS) has gained traction over the years, particularly among private sector employees who had limited retirement savings options. Initially introduced in 2004 for government employees, the scheme was later extended to include all individuals, including private sector workers and self-employed individuals. However, the investment rules and benefits under NPS differ slightly for government employees and others.
One of the standout NPS features is its tax-exempt status, classified under the EEE (Exempt-Exempt-Exempt) category. This implies that contributions made to the NPS, the returns earned during the investment period, and the final withdrawals are all exempt from taxation under the Old Tax Regime.
NPS benefits under Old Tax Regime
Under the old regime, employees contributing to the NPS are eligible for a tax deduction of up to 10% of their salary (Basic + DA), subject to the overall limit of Rs 1.5 lakh under Section 80CCE. Additionally, Section 80CCD(1B) provides an extra tax deduction of up to Rs 50,000, which is over and above the Rs 1.5 lakh cap. There is, however, no maximum limit for NPS investment.
NPS benefits under New Tax Regime
However, under the New Tax regime, only the contribution made by your employer, covered under Section 80CCD(2), is eligible for tax benefits. Because, most private sector employees do not get any NPS benefit from their employer, the provision doesn’t help.
Technically, under Section 80CCD(2) (Old Tax Regime), up to 10% of the employee’s basic salary put in the pension scheme is tax-free. This limit is higher at 14% for taxpayers who have opted for the new tax regime, but as mentioned above private sector employers do not offer NPS benefit to their employees.
Should you rethink your NPS investment strategy under New Tax Regime?
Under the New Tax Regime, NPS account holders no longer receive the same tax benefits that were available under the Old Tax Regime. This has led many to question whether it’s still worth investing in NPS. Without the tax deductions, some might feel that the returns from NPS —typically around 10%, due to the growing debt allocation as the account matures — are not attractive enough. This raises the question of whether other investment options, like mutual funds, which offer higher potential returns, might be a better choice for those seeking to maximise their investment returns.
It’s clear that if an individual is investing in NPS and utilising the full Rs 2 lakh limit under Sections 80CCE and 80CCD(1B), they would benefit more by staying under the Old Tax Regime. In addition to the NPS tax benefits, the Old Tax Regime also offers various other deductions, such as those under Section 80C and Section 24B, making it still a more attractive option for taxpayers looking for maximum savings.
What do experts think about NPS investment choices?
Rajesh Khandagale, Senior VP at KFin Technologies, points out that every investment option has its pros and cons. “NPS is a judicious mix of returns, risk, and tax-saving opportunities. Due to its inherent nature, it inculcates the habit of long-term investment. NPS is a choice for individuals who are looking for a fixed and continuous pension income for themselves and their families. At the pensionable age, one should not be worrying about returns and interest rates impacting your regular income – NPS provides for that comfort.”
Rajeev Gupta, Executive Vice President & Business Head at Religare Broking Limited, also weighs in on the matter, saying, “The National Pension System (NPS) is not merely a tax-saving tool; it is a powerful retirement planning vehicle, especially for young taxpayers. For anyone who is just starting a career, NPS serves a dual purpose of tax optimisation and wealth creation, while also offering a structured way to build a retirement corpus.
“Under the old tax regime, NPS contributions can claim tax deductions up to Rs 2 lakh per annum. These deductions, combined with the flexibility to choose investment options, make NPS a robust long-term investment pool,” he added.
“Furthermore, employer contributions up to 10% of basic salary and dearness allowance can be deducted under Section 80CCD(2). Those who wish to opt for the New Tax Regime should also not miss NPS. It offers a higher employer contribution deduction facility in the new regime, i.e., up to 14% of basic salary under Section 80CCD(2), improving the tax-saving potential. All in all, with its market-linked returns and flexible investment choices, NPS provides an excellent gateway to a stress-free retirement under both tax regimes,” Gupta explained.
