Enhanced employer contributions
In response to an ET report, the Finance Minister, Nirmala Sitharaman, highlighted in her Price range 2024 speech that the deduction for employers’ contributions in the direction of NPS can be elevated from 10% to 14% of the worker’s wage. This deduction applies to staff within the personal sector, public sector banks, and undertakings who go for the brand new tax regime.
Tax advantages on NPS investments
The tax advantages on investing in NPS depend upon the tax regime chosen by the taxpayer within the related monetary yr. Below the present revenue tax legal guidelines, the outdated tax regime permits for 3 deductions underneath the Earnings-tax Act, 1961, whereas the brand new tax regime permits just one deduction.
Deductions underneath the outdated tax regime
Part 80CCD (1):
- Eligibility: Accessible for investments in NPS Tier-I.
- Most Deduction: 10% of wage or Rs 1.5 lakh (whichever is decrease).
- Be aware: This deduction is a part of the general Rs 1.5 lakh restrict underneath Part 80C. If you happen to make investments Rs 1.5 lakh in different eligible avenues underneath Part 80C, you can not declare further deductions for NPS underneath this part.
Part 80CCD (1B):
- Eligibility: Accessible for investments in NPS Tier-I.
- Most Deduction: A further Rs 50,000 over the Part 80C deduction.
- Be aware: This deduction is on the market solely underneath the outdated tax regime.
Part 80CCD (2):
- Eligibility: Accessible for employer contributions to the worker’s Tier-I NPS account.
- Most Deduction: As much as 10% of wage.
- Be aware: This deduction is on the market underneath each the outdated and new tax regimes.
Tax advantages underneath the brand new tax regime
Part 80CCD (2):
- Eligibility: Accessible for employer contributions to the worker’s Tier-I NPS account.
- Most Deduction: As much as 14% of wage for personal sector staff and authorities staff.
- Cap: The mixed employer contributions to NPS, Workers’ Provident Fund, and superannuation fund are capped at Rs 7.5 lakh in a monetary yr. Any extra is taxable, and the curiosity earned on extra contributions can also be taxable.
Maximising tax deductions
Below the outdated tax regime, a person can declare as much as Rs 9.5 lakh in deductions by way of three routes:
- Part 80CCD (1): Most Rs 1.5 lakh
- Part 80CCD (1B): Rs 50,000
- Part 80CCD (2): Most Rs 7.5 lakh
Below the brand new tax regime, a person can declare a deduction of as much as Rs 7.5 lakh underneath Part 80CCD (2).
Earnings tax on NPS withdrawals
Upon withdrawal, a person should use at the very least 40% of the NPS corpus to buy an annuity plan from an insurance coverage firm. The remaining 60% could be withdrawn as a lump sum.
- Lump sum withdrawal: Exempt from revenue tax
- Annuity: Taxable underneath the pinnacle “Earnings from different sources”. The pension obtained from life insurance coverage firms doesn’t qualify for the usual deduction tax profit.
Current PFRDA bulletins
On October 27, 2023, the Pension Fund Regulatory and Improvement Authority (PFRDA) introduced that NPS subscribers can withdraw as much as 60% of their pension corpus through a scientific lump sum withdrawal (SLW) technique. Subscribers can withdraw the lump sum in a phased method (month-to-month, quarterly, half-yearly, or yearly) as much as the age of 75 years.
Nonetheless, there’s nonetheless a scarcity of readability amongst tax consultants relating to the tax-free standing of cash withdrawn through the SLW technique.
On January 12, 2024, the PFRDA issued a grasp round on partial withdrawals from the NPS Tier-I account. Partial withdrawals are allowed for particular causes similar to:
- Increased schooling or marriage of kids (together with legally adopted).
- Buy or development of a residential home or flat within the subscriber’s identify or collectively with their legally wedded partner.
Different circumstances for partial withdrawal embody:
- As much as 25% of the subscriber’s contribution (excluding employer’s contribution).
- The subscriber should have been a member of NPS for at the very least three years.
- A most of three partial withdrawals are allowed till the maturity of the NPS account.
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