The National Pension System (NPS) has gained traction over the years, particularly among private sector employees who had limited retirement savings options. Initially introduced in 2004 for government employees, the scheme was later extended to include all individuals, including private sector workers and self-employed individuals. However, the investment rules and benefits under NPS differ slightly for government employees and others.
One of the standout NPS features is its tax-exempt status, classified under the EEE (Exempt-Exempt-Exempt) category. This implies that contributions made to the NPS, the returns earned during the investment period, and the final withdrawals are all exempt from taxation under the Old Tax Regime.
NPS benefits under Old Tax Regime
Under the old regime, employees contributing to the NPS are eligible for a tax deduction of up to 10% of their salary (Basic + DA), subject to the overall limit of Rs 1.5 lakh under Section 80CCE. Additionally, Section 80CCD(1B) provides an extra tax deduction of up to Rs 50,000, which is over and above the Rs 1.5 lakh cap. There is, however, no maximum limit for NPS investment.
Also read: UPS: Know how much pension a central govt employee will get with less than 25 years of service – Formula explained!
NPS benefits under New Tax Regime
However, under the New Tax regime, only the contribution made by your employer, covered under Section 80CCD(2), is eligible for tax benefits. Because, most private sector employees do not get any NPS benefit from their employer, the provision doesn’t help.
Technically, under Section 80CCD(2) (Old Tax Regime), up to 10% of the employee’s basic salary put in the pension scheme is tax-free. This limit is higher at 14% for taxpayers who have opted for the new tax regime, but as mentioned above private sector employers do not offer NPS benefit to their employees.
Should you rethink your NPS investment strategy under New Tax Regime?
Under the New Tax Regime, NPS account holders no longer receive the same tax benefits that were available under the Old Tax Regime. This has led many to question whether it’s still worth investing in NPS. Without the tax deductions, some might feel that the returns from NPS —typically around 10%, due to the growing debt allocation as the account matures — are not attractive enough.
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