Income Tax Budget: NPS under new tax regime?

In the upcoming interim Budget for 2024, the Centre is reportedly considering measures to enhance the attractiveness of the National Pension System (NPS), with a focus on individuals aged 75 and above. The Pension Fund Regulatory and Development Authority (PFRDA) has advocated for "parity" in taxation with the Employees' Provident Fund Office (EPFO) concerning employer contributions.

One of the key proposals is to introduce potential tax concessions on contributions and withdrawals for NPS, particularly for individuals aged 75 and above. The PFRDA has suggested making the annuity portion of the NPS tax-free for this age group. Additionally, there is a proposal to combine NPS contributions with interest and pension, simplifying the tax process for senior citizens above 75 years, who may not have to file returns if they hold NPS proceeds. Currently, the lump-sum withdrawal of 60% from NPS is already tax-free.

To further incentivize long-term savings through the NPS and alleviate the tax burden on seniors, Deloitte's Budget expectations recommend extending tax relief to the annuity portion for holders aged 75 and above.

Furthermore, there are calls for tax breaks on NPS contributions under the new tax regime. Presently, contributions of up to ₹50,000 to the NPS under Section 80CCD (1B) qualify for a deduction under the old tax regime but not under the new structure. This deduction is separate from the ₹1.5 lakh tax relief provided under Section 80C in the old tax regime.

In parallel, the government is reviewing the pension system for government employees through a committee led by Finance Secretary T V Somanathan. The committee is expected to provide recommendations for potential modifications to the NPS framework for government employees, considering fiscal implications and the overall budgetary landscape. However, the report from this committee is still awaited.