Budget 2025: Will Finance Minister change taxation of NPS for New Tax Regime, as well as NPS Vatsalya deductions for investors?

The National Pension Scheme (NPS) stands out as one of the best options to start a retirement fund, with one of the country’s largest subscriber populations.

The NPS was first introduced by the Union Government in 2004 with the purpose of creating a universal pension scheme for central government employees.

However, it was later enlarged in 2009 to cover self-employed people and those working in the private sector under corporate and all-citizen models. Over the years, the NPS has delivered promising returns of 9-12%, allowing investors to diversify their portfolios across multiple asset types.

NPS under New Tax Regime

Contributions of up to Rs.50,000 to the National Pension System (NPS) under Section 80CCD(1B) are now only eligible for deductions under the old tax regime. Unfortunately, this benefit is not valid under the new tax regime.

It is essential that the new tax regime also allows for tax deductions on NPS payments of up to Rs.50,000 under section 80CCD(1B), as more taxpayers migrate to the newer regime.

Experts emphasise the importance of including this exemption in the Union Budget 2025, among the other benefits of the new tax system. This feature may encourage more people to switch from the old tax system to the new one, as the NPS is growing more popular for retirement planning.

In the 2024 Budget, the deduction for employer contributions to pension schemes under Section 80CCD (2) was doubled from 10% to 14% of pay for private sector employers. The benefit of this modification is solely applicable to taxpayers who choose the new tax regime under Section 115BAC. Following this new amendment, it is envisaged that the deduction of NPS for self-contribution would be made available for the New Tax regime, making the plan more appealing to taxpayers. The government intends to progressively move the majority of taxpayers from the existing to the new tax regimes.

The new regime provides no tax benefits for self-employed individuals. So, we hope that the specific deduction limit of Rs.50,000 (section 80CCD(1B)) available under the old tax regime will be incorporated into the new tax structure as well.

In the 2024 Budget, the deduction for employer contributions to pension schemes under Section 80CCD (2) was increased from 10% to 14% of salary for private sector employers. This change solely benefits taxpayers who choose the new tax regime under Section 115BAC.

Tax Deductions on NPS Vatsalya

FM Sitharaman proposed NPS Vatsalya for minors in Budget 2024, and it was formally launched on September 18, 2024. This system allows parents to contribute on behalf of their children to the NPS, ensuring their financial security and instilling the habit of saving for retirement at an early age.

The main purpose of NPS Vatsalya is to promote long-term financial security and encourage early retirement savings habits. Parents can open accounts for their children and contribute to their retirement savings, establishing disciplined saving habits at a young age.

The tax consequences of the NPS Vatsalya Scheme have not yet been disclosed by the government, as the scheme’s tax structure is still to be announced.

The introduction of the NPS Vatsalya Scheme, a minor-centric variant of the standard NPS, in the Union Budget 2024 has the potential to significantly secure a child’s financial future. However, the government has not yet provided clarity on the tax savings prospects available through the Vatsalya scheme. Enhanced taxation policies, paired with market-linked rewards, can improve financial stability by making the program more appealing to parents through tax benefits.

For example, introducing tax deductions for the NPS Vatsalya Scheme under the Income Tax Act of 1961 can provide two benefits: reducing the contributor’s overall liability of tax and ensuring the child’s financial security in future.