Union Budget 2024: Should you invest more in NPS now in the new tax regime?
This article analyses the change in NPS-related tax deductions as per the Union Budget 2024.
Union Budget 2024: Should you invest more in NPS now in the new tax regime?
Posted on 23 Jul 2024
Author: Sayan Sircar
8 mins read
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This article analyses the change in NPS-related tax deductions as per the Union Budget 2024.
This article is a part of our detailed article series on Union Budget 2024. Ensure you have read the other parts here:
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Union Budget 2024: What are the most important changes that will now affect your portfolio?
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📚 Topics covered:
- What did Union Budget 2024 change about NPS-related tax deduction?
- What tax benefits are there for NPS in the Old Tax Regime as per Union Budget 2024?
- What tax benefits are there for NPS in the New Tax Regime as per Union Budget 2024?
- Should you now invest in NPS because there is more tax deduction allowed as per Union Budget 2024?
What did Union Budget 2024 change about NPS-related tax deduction?
Source: https://www.indiabudget.gov.in/doc/budget_speech.pdf
Union Budget 2024 added a new incentive for taxpayers to switch to the New Tax Regime by increasing the deduction available under non-government employer contributions to the NPS. It raised the eligibility amount from 10% to 14% of basic pay plus dearness allowance (DA).
What tax benefits are there for NPS in the Old Tax Regime as per Union Budget 2024?
NPS self-contribution deduction benefit [under Section 80CCD(1B)] of up to ₹50,000/year is available only in the Old Tax Regime.
Also, Employer NPS Contribution [under Section 80CCD(2)] is available up to 10% of basic salary (plus DA) as a deduction.
What tax benefits are there for NPS in the New Tax Regime as per Union Budget 2024?
NPS self-contribution deduction benefit [under Section 80CCD(1B)] of up to ₹50,000/year is NOT available in the New Tax Regime.
However, Employer NPS Contribution [under Section 80CCD(2)] is available up to 14% (up from 10% as per the 23-Jul-2024 Budget) of basic salary (plus DA) as a deduction.
To understand should you increase or start contributing in NPS:
Note: Tax-free employer contribution to EPF, NPS and Superannuation fund combined is still ₹7.5 lakhs. Beyond that, the contribution to EPF beyond this ₹7.5 lakhs will become taxable.
Should you now invest in NPS because there is more tax deduction allowed as per Union Budget 2024?
We are not fans of NPS in its current structure due to the forced 40% or more annuity-purchase rule and the fact that your money is locked up until age 60. We have argued this point in detail here: Is NPS the right option for your retirement planning?.
Related: Which is the best tax regime to choose from April with these new NPS changes?
A 4% extra tax deduction, since it is on your basic (plus DA), is not a substantial amount just to incentivise putting more money into NPS:
| Basic plus DA | 10% of Basic | 4% extra contribution | Extra tax saving |
|---|---|---|---|
| 5 lakhs | 50,000 | 20,000 | 6,000 |
| 10 lakhs | 100,000 | 40,000 | 12,000 |
| 15 lakhs | 150,000 | 60,000 | 18,000 |
| 20 lakhs | 200,000 | 80,000 | 24,000 |
In return, you are sacrificing liquidity on the 14% of the basic plus DA amount, which is not negligible at all. There are additional market-timing risks of NPS that you must be aware of: The unknown risk in NPS that few people talk about
However, if you decide to choose NPS, here are two useful articles:
Related Articles
- Union Budget 2024: What are the most important changes that will now affect your portfolio?
- Budget 2024: Will indexation benefit apply to property purchased before 2001?
- Union Budget 2024: which is the best tax regime to choose from 1st April 2024? (July 2024 update)
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