Budget 2024: National Pension System benefits extended. Here are details on taxation, deductions under both tax regimes

Union Budget impact: The Union Budget 2024-25 proposed several changes in terms of personal finance and income tax. Like National Pension System (NPS) contribution limits for private sector employers have recently been increased from 10% to 14% of the employee's basic salary. Similarly, for both private and public sector employees, the deduction limit has also been raised from 10% to 14%. It is important to note that these benefits are applicable exclusively under the New Tax Regime.

The National Pension System (NPS) is a government-sponsored retirement savings scheme that provides tax benefits under both old and new tax regimes in India. NPS taxation differed from the Old Tax Regime and New Tax Regime. Under the old tax regime, NPS offers tax benefits under three sections of the Income Tax Act, 1961.  

Meanwhile before this Budget, under the new tax regime, individuals could avail of a deduction under Section 80CCD (2) of the Income Tax Act by investing in NPS. This deduction allows for a reduction in the gross total income if an employer contributes to the NPS account on behalf of the employee.

Under the Old Tax Regime, various tax deductions and exemptions are provided within different sections of the Income Tax Act. These encompass deductions for House Rent Allowance (HRA), Leave Travel Allowance (LTA), standard deduction, education or hostel allowance for children, professional tax, home loan interest under Section 24, and additional allowances. 

Under the New Tax Regime, certain exemptions and deductions are not available to taxpayers, including HRA, LTA, 80C, 80D, and more. However, salaried individuals can still claim two deductions: Standard Deduction and the deduction under section 80CCD (2) for the employer's contribution to the National Pension System (NPS).

NPS additions under New Tax Regime (Budget 2024-25)

1. Employees choosing the New Tax Regime are now eligible for a higher deduction of up to 14% of their basic salary for the contribution made to the NPS by the employer on behalf of the employee as per the provisions of Section 80CCD(2) in the Income Tax Act.

2. The Union Budget for the year 2024 announced a significant increase in the deduction allowed on employers' contributions to employees' NPS. 

The deduction has been raised from 10% to 14% of the employees' basic salary. It is important to note that this increased deduction rate will be applicable to both public-sector companies and private-sector entities under the new regime. 

Government employees, however, already benefit from a 14% deduction on their NPS contributions. This enhanced deduction falls under Section 80CCD(2) of the Income Tax Act and is available in both the existing and the new simplified tax regimes. Nonetheless, the higher rate of 14% will only be applicable under the newly introduced simplified tax regime.

"To improve social security benefits, deduction of expenditure by employers towards NPS is proposed to be increased from 10 to 14 per cent of the employee’s salary. Similarly, deduction of this expenditure up to 14 per cent of salary from the income of employees in private sector, public sector banks and undertakings, opting for the new tax regime, is proposed to be provided," FM Nirmala Sitharaman said in her Budget 2024 speech.

Taxation under Old Tax Regime

Taxpayers going with the Old Tax Regime can claim tax deductions against NPS under three sections of the Income-tax Act, 1961: Sections 80CCD (1), 80CCD (1B), and 80CCD (2).

Under the Old Tax Regime, Section 80CCD (1) of the Income-tax Act, 1961, a deduction from taxpayers' gross total income for contributions made to the NPS is allowed. Both salaried and self-employed taxpayers can avail of the deduction under Section 80CCD(1). The maximum deduction under this section is — 10% of your salary (Basic + DA) for salaried individuals or 20% of gross total income for self-employed. The upper limit is Rs 1.5 lakh in a financial year.

One should note that the total deductions under section 80C, section 80CCC and section 80CCD should not exceed Rs 1.5 lakh.

Section 80CCD (1B) offers an additional deduction of up to Rs 50,000 for contributions to NPS, which is over and above the limit of Rs 1.5 lakh available for taxpayers under Section 80CCD (1).

Section 80CCD (2) specifically applies to the employer's contribution towards an employee's NPS account. 

Consequently, this benefit is exclusively accessible to salaried taxpayers.  Employees in the private sector may have the opportunity to modify their salary structure to include employer contributions to the National Pension System (NPS), which are deducted from their overall cost-to-company (CTC) package.

Taxation under New Tax Regime

Under the New Tax Regime, individuals can avail the advantage of employer contributions to their NPS accounts as per Section 80CCD(2) of the Income Tax Act. This deduction is limited to the employer's NPS contributions made on behalf of the employee, up to 10 per cent of the employee's salary (Basic + DA).

The NPS website stated additional Tax Benefit is available to Subscribers under the Corporate Sector as per section 80CCD (2) of the Income Tax Act. According to this provision, the Employer's NPS contribution made for the benefit of the employee, up to 10% of the salary comprising Basic and DA, is deductible from the taxable income. The maximum limit for this deduction is up to 7.5 Lakh 

After the 10% salary limit has been raised to 14%.

If you are considering the adoption of the new income tax regime, it is imperative to note that certain deductions provided under the Income Tax Act would no longer be available. Specifically, under the new regime, deductions under Section 80CCD (1) and Section 80CCD (1B) will be foregone. However, it is important to highlight that individuals can still avail income tax deductions for contributions made to the National Pension System (NPS) under Section 80CCD (2) in the new income tax regime.

If you are considering the new income tax regime, it is important to understand that by choosing this regime, you will not be able to claim deductions available under Section 80CCD (1) and Section 80CCD (1B) of the Income Tax Act.