Budget 2024: Higher Employers' Contribution Allowed As Deduction Can Make NPS Attractive

The National Pension Scheme has been slowly gaining ground as more people use this for the purpose of their retirement planning.

Under the old tax regime, this already had an additional benefit of Rs 50,000. But the Union Budget 2024–25 has made some changes by increasing the deduction for employers' contribution under the new tax regime.

This makes the NPS more attractive for the salaried. However, there might be restricted use of this benefit as it is available only for those opting for the new tax regime and cannot be used by the non-salaried.

Here is a close look at how the various contributions to the NPS can be claimed by the individual taxpayer. 

The NPS consists of different types of contributions based on the category of individual. For example, if you are an employee and this is part of the retirement compensation allowed by the employer, then there will be amounts contributed by both the employer and the employee.

For a non-salaried individual investing on their own, it will be just the individual who is contributing to the scheme. The entire change in the budget deals with the situation where both the employer and the employee are contributing and hence, those contributing on their own will not benefit. 

The budget has made the change whereby apart from the central and the state governments, if any other employer is contributing to the NPS, then up to 14% of the salary of the employee will be allowed as a deduction for the employee if they are in the new tax regime.

Earlier, the deduction for the employers' contribution was 14% if the employer was the central or state government and only 10% for other entities, which would cover the private entities.

When it comes to the old tax regime, there are several benefits that the NPS provides for the individual. Here we are looking at the situation for the salaried taxpayer.

As far as the contribution of the employee is concerned, their own contribution is eligible under Section 80CCD(1), along with Section 80C up to Rs 1.5 lakh. Section 80CCD(1B) allows an additional contribution of Rs 50,000 as a deduction too, taking the overall benefit to Rs 2 lakh.

On top of this, the employers' contribution of up to 14% of salary in case of central or state government employees and 10% of salary in case of other entities can also be claimed as a deduction under Section 80CCD(2).

Under the new tax regime, there is no tax benefit that is available for the employees' contribution. Therefore, this benefit that was available under the old tax regime goes away along with several other deductions. Now, with the changes in the budget, the employee can claim a deduction under Section 80CCD(2) up to 14% of the contribution of the employer if they are central or state government or even if they are other entities.

Earlier, the deduction limit for other entities was 10% but this higher limit of 14% means that more amounts can be claimed if this is contributed by the employer. However, since this is available only under the new tax regime, it becomes an extra benefit for opting for the new tax regime.

Arnav Pandya is the founder of Moneyeduschool.