National Pension Scheme or NPS has gained popularity over the years as Indians have started to take retirement planning seriously. NPS offers you dual benefits of tax-saving and buoyant returns.
No wonder its assets under management (AUM) recorded a strong growth of 30.5% year-on-year in the financial year 2023-2024 to hit ₹11.73 lakh crore.
This year's Budget has gone a step further to make the National Pension Scheme even more attractive for salaried individuals.
The government, in this Budget, has proposed to increase the contribution limit by employers to NPS from 10% to 14% of employee's basic salary. Apart from this, they have announced the NPS Vatsalya scheme. Let's understand these in detail.
Changes to the National Pension Scheme in Budget 2024
The one major change to NPS in the Budget is the increase in deduction on employers' contributions to the National Pension System for employees from 10% to 14% of the basic salary. Let us simplify.
Previously, under Section 80CCD(2), employees could contribute 10% of their basic salary towards the National Pension Scheme tax-free. Now, this deduction has been boosted to 14% of the basic salary for employees. This means more money can go towards retirement savings tax-free.
However, this benefit of a higher limit of 14% is only available to employees under the new tax regime. If you have opted for the old tax regime, you can avail a deduction of up to 10% under Section 80CCD(2) on your basic pay, the same as earlier.
Initially, only government employees enjoyed the 14% deduction privilege. But now, this Budget has extended the benefit to everyone working (even in the private sector).
Let's understand with an example:
Imagine you have a basic salary of ₹20,000 per month. Earlier, your employer could contribute 10% of ₹20,000 to your NPS account, which amounts to ₹2,000.
Now, with the new limit, your employer can contribute ₹2,800 or 14% of your basic pay. This means you are contributing ₹800 more monthly towards your retirement savings and ₹9,600 annually.
| Monthly Basic Pay | Monthly Contribution to NPS (Earlier @ 10%) | Monthly Contribution to NPS (Now @ 14%) |
| 20,000 | 2,000 | 2,800 |
(All figures in ₹)
How much tax will you save with new NPS rules?
Let's understand with examples how much tax you can save under the proposed NPS rules in the new tax regime.
We have considered three scenarios with different basic pay. The existing annual NPS contribution is calculated at a rate of 10%, while the proposed annual NPS contribution is computed at 14%, as announced in the Budget.
The table clearly shows that on basic monthly pay of ₹25,000, you save ₹624 in taxes annually. But the figure grows significantly as the basic salary increases. Therefore, on a basic pay of ₹1 lakh, you can save nearly ₹10,000 in annual taxes.
Basic Pay (per month) | Annual Salary (basic pay) | Existing Annual NPS Contribution | Earlier Tax Saved | Proposed Annual NPS Contribution | Proposed Tax Saved | Additional Tax Saved |
| 25,000 | 3,00,000 | 30,000 | 1,560 | 42,000 | 2,184 | 624 |
| 50,000 | 6,00,000 | 60,000 | 6,240 | 84,000 | 8,736 | 2,496 |
| 1,00,000 | 12,00,000 | 1,20,000 | 24,960 | 1,68,000 | 34,944 | 9,984 |
(All figures in ₹)
Therefore, enhanced NPS deduction under Section 80CCD(2) allows you to save more for your retirement with enhanced tax savings. To easily calculate your retirement corpus through investments in NPS, you can use INDmoney's NPS Calculator.
What is NPS Vatsalya?
There is now a new way for parents to plan for their children's future – NPS Vatsalya.
The NPS Vatsalya scheme is a special version of the National Pension System customised for younger individuals.
Under the NPS Vatsalya scheme announced in Budget 2024, parents and guardians can contribute money for minors into an NPS account. When the child turns 18, this unique account transitions into a regular NPS account.
Through this scheme, parents can start investing in their kid's financial future from a very young age. Experts believe that it is a great way to teach Indian families about savings and lay a solid financial foundation to secure their future.
More details on the NPS Vatsalya scheme are awaited and will be updated in this article when available.
Overview of the National Pension Savings Scheme
The National Pension Scheme is a voluntary pension scheme that allows planning for retirement. It was introduced in 2004. The scheme aims to provide financial security in old age. The Pension Fund Regulatory and Development Authority, or the PFRDA, oversees this scheme.
NPS offers many benefits, but the two major advantages for individuals are - tax saving and retirement planning. This scheme is available to all Indian citizens aged 18-70 and employed in the private, public, or unorganised sectors.
The scheme is market-linked and managed by professional fund managers.
How NPS Works
In the National Pension System, individuals save money that's pooled into a pension fund. The managers invest these savings in a mix of assets like government bonds, corporate debentures, and shares to grow the money over time.
You keep contributing to your NPS account until you retire. The fund's value grows based on how well these investments perform in the market. Over the last ten years, different asset classes under NPS have given 10% or more returns.
When you retire, at least 40% of your NPS savings are used to buy a pension plan that pays you regularly for the rest of your life. The rest of the money can be taken out as a lump sum, giving you flexibility in how you use it. This lump sum withdrawal is also tax-free.
How to Open an NPS Account
To start your NPS journey, you can follow these steps:
- Choose a Point of Presence (POP) like a bank or broker, such as INDmoney or any other intermediary registered with PFRDA.
- Fill out a subscriber registration form and submit KYC documents.
- Once approved, your NPS account will be opened, including Tier-I and Tier-II accounts. You'll receive a PRAN card, login ID, and other necessary details.
- Decide on your investment strategy, either 'Active' or 'Auto Choice.' With 'Auto Choice,' your funds are automatically invested based on a preset allocation.
- Diversify your investments across different asset classes for better growth potential.
- You can also select NPS fund managers for each asset type to manage your investments effectively. This setup helps tailor your NPS savings to fit your financial goals and risk tolerance.
Conclusion
The recent changes to the National Pension Savings Scheme have made it more attractive for employees under the new tax regime. With this, the government has tried to promote retirement planning and the new tax regime option. By investing in NPS, you can create a retirement corpus. It will help you enjoy the power of compounding in a tax-efficient manner.