As India gears up for Budget 2024, expectations are high for transformative reforms that can change the landscape of the nation’s pension system, improve retirement planning capabilities and enhance financial security for millions of subscribers.

Expected improvement in tax benefits

One of the major speculations surrounding Budget 2024 revolves around substantial improvements in tax benefits for National Pension System (NPS) contributors. Experts expect that the government may increase the maximum deduction limit under Section 80CCD(1) of the Income Tax Act to Rs 2.5 lakh from the current Rs 2 lakh. This tweak could potentially incentivize taxpayers to increase allocations to their NPS accounts, encouraging stronger retirement saving habits and ensuring a more robust financial future.

Revised contribution limits for more flexibility

Another area that is eagerly awaited is the revision of contribution limits. Analysts suggest that Budget 2024 could increase the permissible limit for employee contributions to NPS from the current 10 percent of salary to 15 percent. Such a move would not only allow individuals to save more tax-efficiently but also enable them to build larger retirement funds, catering to diverse financial needs and aspirations.

Strengthening the pension planning framework

Budget 2024 is expected to strengthen the NPS as a cornerstone of India’s retirement planning framework. By expanding contribution options and enhancing tax benefits, the government aims to promote disciplined, long-term savings behaviour among citizens. This strategic emphasis is intended to promote financial prudence and ensure resilient retirement income streams for individuals post-service.

The proposed reforms aim to significantly increase financial security among NPS subscribers. Potential increases in tax benefits and contribution limits are expected to make the NPS a more attractive retirement savings vehicle, encouraging broader participation and facilitating access to reliable retirement benefits across socio-economic groups.

“NPS is a government-backed retirement savings plan. The plan allows individuals to contribute to their retirement throughout their working life. Launched in 2004 by the Pension Fund Regulatory and Development Authority (PFRDA), NPS was initially intended for government employees but was made available to all individuals in 2009. NPS offers a number of benefits including safe returns, tax benefits, low fees, etc.,” said Anita Barur, Partner, Sudit K Parekh & Co. LLP.

It was mentioned that under the existing rules, individuals can claim a maximum deduction of up to Rs 50,000 for contributions to the NPS. Also, only 60% of the NPS corpus is tax-free at the time of withdrawal. Subscribers have the option to use their accumulated pension assets to purchase an annuity from a PFRDA-panelled life insurance company or they can withdraw a part of the pension assets as a lump sum if they wish.

“Under the new regime, there are very few deductions that a taxpayer can claim. It is expected that NPS will also be allowed under the new regime. Taxpayers are looking for a higher deduction limit for NPS and an increase in the tax-free corpus limit to enhance their post-retirement income. An increase of 75 to 80 per cent in the tax-free corpus would be more beneficial and bring NPS in line with other retirement savings instruments such as Employees’ Provident Fund (EPF),” Barur said.

Addressing discrepancies in tax treatment

If implemented, the expected reforms will also address the significant differences in tax treatment and benefits between the National Pension Scheme (NPS) and the EPF.

Currently, EPF allows the entire accumulated corpus to be tax-free at retirement, while NPS allows only up to 60 percent tax-free and the remaining 40 percent is mandatorily used to purchase annuities, which are taxable. This disparity restricts NPS subscribers from managing their pension funds as flexibly as EPF subscribers.

EPF subscribers enjoy unlimited investment freedom, while NPS subscribers are required to use 40 percent of their assets to purchase annuities, which typically offer lower returns compared to other investment options such as mutual funds.

Tax benefits for employer contributions to NPS vary, with central government employees enjoying a higher deduction limit (14 per cent) compared to other employees (capped at 10 per cent). This lack of uniformity calls for equal treatment of all categories of employees contributing to the NPS.

There is confusion over the taxation on withdrawals from NPS Tier-II account, which is not clear and consistent as compared to mutual funds. Clear guidelines are needed to ensure fairness and transparency for all NPS subscribers.

Currently, only central government employees can claim deductions under Section 80C for contributions made to NPS Tier-II accounts with a lock-in period of three years. Extending this benefit to all subscribers will ensure fair tax treatment across the board.

Looking forward

The expected reforms to the NPS ahead of Budget 2024 promise to significantly transform India’s retirement savings landscape. By aligning tax benefits with long-term savings goals and addressing benefit disparities between NPS and EPF, the government can strengthen the NPS as a key tool to ensure financial security during retirement years. These reforms not only aim to boost savings but also reflect a strategic vision to improve the overall economic resilience of the country’s ageing population. As the Budget unfolds, these measures are poised to chart a new trajectory for retirement planning in India, emphasising the importance of prudent financial planning and sustainable wealth creation for future generations.

Find us on YouTube

Subscribe