The government intends to entice people to switch to the new tax regime, which has lower tax rates but far fewer exemptions or deductions. Currently, contributions of up to Rs 50,000 to the National Pension System (NPS) under Section 80CCD(1B) qualify for deductions only under the old tax regime, and this benefit is not available in the new regime.According to experts, this makes it even more imperative that the new tax regime permit the tax benefit for NPS contributions up to Rs 50,000 under section 80CCD (1B). They say that it is hoped the Union Budget 2025 will include this crucial and essential exemption in addition to those offered under the new tax system. This might persuade more people to switch from the previous tax system to the new one, since NPS is gradually gaining traction as a tool for retirement planning.
Also read: Income tax benefits of NPS under both old and new tax regime for government and private sector employees
The new tax regime, which combines reduced tax rates with a very small number of deductions, is intended to entice people to switch.
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. The benefit of this modification is solely applicable to taxpayers who choose the new tax system under Section 115BAC.
Here are the opinions of experts on whether the new tax regime will allow for a 50K NPS deduction in Budget 2025.
Kinjal Bhuta, Secretary, Bombay Chartered Accountants’ Society (BCAS), says,”The National Pension Scheme was opened for all in 2009 as an investment instrument for creating retirement corpus. The deduction was available under section 80CCD of the Income Tax Act, 1961. Deductions under section 80CCD had two components – one where contribution is made by the employer and second where any tax payer can contribute on its own. The deduction for contribution made by the employer is available under old and new regimes of taxation both, however the deduction towards self-contribution to NPS under section 80CCD (1) was discontinued in the New Tax regime. In the 2024 Budget, the deduction against employer’s contribution to pension scheme u/s. 80CCD (2) has been increased to 14% of salary for private sector employers from 10%. The benefit of this amendment was made only applicable to those taxpayers who are opting for the new tax regime u/s. 115BAC. Taking cue from this latest amendment made, it is anticipated that the deduction of NPS for self-contribution may also be made available for the New Tax regime to make the scheme more attractive for tax-payers. The Government is intending to gradually transition the majority of taxpayers from the old regime to the new tax regime. This is quite evident from constant and steady efforts over the past few years in making the new tax regime more tax efficient. Allowing NPS deductions under the New Tax regime could significantly help to achieve this goal.”
Also read: Hike basic exemption limit to Rs 5 lakh, cut income tax rates, further reduce number of TDS rates in Budget 2025: EY
Yogesh Kale, Executive Director , Nangia Andersen LLP, says, “The new tax regime was presented as one being easy to understand to a layman and was subsequently also made the default tax regime. However, the new tax regime allows fewer deductions to the taxpayer and restricts the investment area in terms of tax benefits available to them. Though, NPS contributions made by the employers up to 10% of the salary of the employees, are still allowed as deduction under section 80CCD(2) of the Income-tax Act even under the new tax regime, allowing an additional deduction of 50,000 under 80CCD(1B) of the Act would make the new tax regime more lucrative.
This is floating as one of the top expectations from the upcoming budget. While there are speculations about the likely proposals to reduce the tax liability for individuals, whether the liability would be reduced by allowing some deductions like the one discussed above under the new regime or it would be just by way of revision in the slabs and slab rates, is something that only time will tell.”
Mihir Tanna, associate director, S.K Patodia LLP, says, “The new tax regime was introduced to make compliance by the taxpayer easier and to make the administration process of the Income Tax Act by the tax authorities less burdensome. At the same time in the budget speech of 2020 our Hon’ble FM said that they will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate.”
Yeeshu Sehgal, Head of Tax Markets, AKM Global, says,”There seems to be a good chance that Budget 2025 might introduce a Rs 50,000 NPS deduction under the new tax regime as people are getting more conscious about their retirement planning than previous generations were. It also aligns with the government’s focus on retirement planning and to make the new regime more appealing to everyone. Including this deduction would also create fairness for those who currently miss out on this benefit by choosing the new regime.”
