I've chosen New Tax Regime since my deductions are under Rs 2 lakh. Can I expect any tax benefits for keeping NPS?

I have opted for the New Tax regime for the current financial year as the total of my deductions will be less than Rs 2 lakh. I hope I have made the right decision. I want to know whether I will get any tax benefits if I continue with NPS.

G Sheshadari

Reply by Rajiv Bajaj, Chairman & MD, BajajCapital Ltd.

Certainly, Mr. Sheshadri. Based on the deductions you've claimed, totalling only Rs 2 lakh, transitioning to the new tax regime would likely be more advantageous for you.

The National Pension System (NPS) is a government-sponsored pension scheme that is accessible to all Indian citizens. It aims to provide a regular income during retirement and offers significant tax advantages. Under the old tax regime, you can claim a deduction for your NPS contributions up to Rs 1.5 lakh under Section 80C and an additional Rs 50,000 under Section 80CCD(1B). The switch to the new regime, however, places a question mark over these benefits.

Under the new tax regime, the majority of the previously available exemptions and deductions, including the one under section 80C, are not available. The new system is based on lower tax rates and fewer slabs, which is designed to benefit taxpayers who didn't have many deductions to claim and were thus paying higher taxes on their income.

However, not all tax-saving avenues have been discontinued under the new regime. A ray of hope is visible under Section 80CCD(2), where the employer’s contribution towards the employee’s NPS accounts for up to 10% of the salary and can still be claimed as a deduction.

Regarding your contribution to the NPS, I want you to know that you won't be eligible for the standard deduction of Rs 50,000 under section 80CCD (1B) in the New Tax Regime as such deductions are not permitted. However, there's a potential opportunity for savings if your employer agrees to contribute up to 10% of your basic salary to NPS on your behalf.

Should your employer opt to make this contribution, this portion of your salary would remain untaxed, presenting a significant opportunity to reduce your overall tax liability. It's best for you to talk with your employer about the possibility of restructuring your salary so that a maximum of 10% of your basic salary can be directed towards NPS, making sure you can use this tax-saving avenue for your future pension and related benefits.

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