Pension regulator PFRDA has urged the Finance Ministry to consider allowing tax breaks/deductions under the new tax regime for contributions made by employees towards their NPS account, which has now become the default system.
Providing tax breaks for NPS contributions — akin to the Sec 80C deduction provided in the old tax regime —would boost savings for retirement and is a must if India has to evolve into a pensioned society, the Pension Fund Regulatory and Development Authority (PFRDA) has submitted to the Finance Ministry in its budget wish list.
Tax breaks
Although the upcoming budget would only be an interim budget (vote-on-account), there is nothing that prevents the government from announcing its tax policy intent if it so desires, sources said. This measure of allowing tax break for NPS contributions could always be taken forward in the full-fledged budget expected to be unveiled in June or July 2024, they said.
Even today, several developed countries allow tax breaks for voluntary pension account contributions, it was pointed out. India is aiming to be a developed country by 2047 and is looking to scale up its flagship pension programmes — the National Pension System and the Atal Pension Yojana.
Already, NPS, which started its journey in 2004 initially with new government recruits as a defined contribution scheme, has grown to touch the level of nearly ₹11-lakh crore, largely bolstered by the enhanced participation of private sector employees and individuals. In 2022-23, as many as a million new non-government subscribers enrolled in the NPS. PFRDA has, for the current fiscal, set its sights on enrolling 13 lakh new subscribers from the non-government segment.
In Budget 2020, the Centre introduced a new income tax regime wherein tax slabs were altered and taxpayers were offered concessional tax rates. However, several exemptions and deductions, such as 80C, 80D, HRA, and LTA, were all done away with under the new regime. The removal of these deductions had led to only a few takers for the new tax regime.
To encourage taxpayers to adopt the new regime, several changes were introduced in Budget 2023 last year. The new regime was also made the default system.
A full tax rebate was introduced on an income up to ₹7 lakh, which meant taxpayers with an income of up to ₹7 lakh will not have to pay any tax at all under the new tax regime.
Also, the tax exemption limit was increased to ₹3 lakh. The standard deduction of ₹50,000, which was only available under the old regime, was extended to the new tax regime as well. This, along with the rebate, made ₹7.5 lakh as a tax-free income under the new regime.
While the previous tax structure encouraged taxpayers to get into the habit of saving, the new tax regime sought to favour employees with lower earnings and investments, resulting in fewer deductions and exemptions.
Under the old regime, there were over 70 exemptions and deductions available, including LTA and HRA, and this would have helped reduce taxable income and lower tax payments. The most popular Section 80C deduction allowed for a reduction of taxable income up to ₹1.5 lakh.
PARITY WITH PF
PFRDA has also, in its budget wish list, made a case for level playing field as regards tax treatment between Corporate contributions to NPS and Provident Fund in respect of employees.
Currently, the tax-exempt contribution is capped at 10 percent for NPS and 12 percent for PF, sources said.