Union Budget 2024: The Centre introduced the New Tax regime to offer lower tax rates to the taxpayers with a very limited number of exemptions. It is important to highlight that the New Tax Regime does not encompass most tax exemptions that were valid under the Old Tax Regime. 

This Budget, the taxpayers and sector experts feel that the government should extend some of the tax exemptions that are valid under the Old Tax Regime. One such investment tool is the National Pension System (NPS).  

An individual can avail a deduction of up to Rs 50,000 towards their contribution to the National Pension System (NPS) under Section 80CCD (1B) in the old tax regime, a benefit not applicable in the New Tax Regime. The government emphasizes the promotion of retirement savings, motivating the allowance of this additional deduction beyond the tax-saving investment cap of Rs 1.5 lakh under Section 80C in the Old Tax Regime.

Ynder the new tax regime, taxpayers can claim the benefit of employer contributions to their NPS account under section 80CCD(2) of the Income Tax Act. This deduction is restricted to the employer's contribution to NPS made for the benefit of the employee, up to 10 per cent of the employee's salary (Basic + DA).

Experts have been emphasizing the importance of retaining the tax break for National Pension System (NPS) contribution of up to Rs 50,000 under Section 80CCD (1B) in the new tax regime. They suggest that including this exemption in the new tax regime would be highly beneficial. Adding this provision may incentivize individuals to transition from the Old Tax Regime to the new one, especially considering the increasing popularity of NPS as a retirement planning tool.

Besides, NPS contributions play a pivotal role in establishing and strengthening a robust social security net. By actively contributing to NPS, individuals pave the way for a secure source of income during their post-retirement phase. This initiative not only promotes financial stability but also fosters a sense of reassurance for taxpayers. 

Furthermore, advocating for increased contributions to NPS aligns with the broader aim of promoting financial inclusion. By incentivizing individuals with tax benefits to partake in a government-supported pension scheme, we move closer towards a society where financial well-being is within reach for all.

The Pension Fund Regulatory and Development Authority (PFRDA) sought consideration from the Finance Ministry, prior to the Interim Budget this year, for the inclusion of tax breaks or deductions in the new tax regime concerning contributions made by employees towards their NPS accounts.

The PFRDA emphasized that incorporating tax benefits for NPS contributions, similar to the Sec 80C deduction available in the previous tax structure, is crucial for enhancing retirement savings. This move is deemed essential for India's transition towards a pensioned society, as articulated by the pension regulator in its budgetary recommendations to the Finance Ministry.

PFRDA has said that the assets under management (AUM) under the NPS may rise by a steep 28% on year to Rs 15 lakh crore by end of 2024-25.

New Tax Regime

In order to encourage taxpayers to embrace the new regime, several adjustments were implemented in Budget 2023 last year. The new system was designated as the default option.

Under the new tax regime, a complete tax rebate was instated on incomes up to Rs 7 lakh. Hence, individuals with an income of up to ₹7 lakh are exempt from paying any tax under this newly established tax system.

Additionally, the tax exemption threshold was elevated to Rs 3 lakh. The standard deduction of Rs 50,000, initially exclusive to the old regime, was expanded to encompass the new tax regime as well. Consequently, with the combined benefits of the rebate and deduction, Rs 7.5 lakh emerged as the new tax-free income cap under this revised tax structure.