The government wants to convince people to move to the new tax system, which has lower tax rates but considerably fewer exemptions and deductions. Contributions of up to Rs 50,000 to the National Pension System (NPS) under Section 80CCD(1B) were previously eligible for deductions, but this benefit is no longer available under the new regime. According to experts, the new tax regime must allow the tax benefit for NPS payments of up to Rs 50,000 under Section 80CCD (1B). They said it is hoped that the Union Budget 2025 will contain this critical and necessary exemption in addition to those provided by the new tax system. This may persuade more people to convert from the former tax system to the new one, as NPS is increasingly gaining popularity as a retirement planning tool. The new tax structure, which combines lower tax rates with a limited number of deductions, is designed to persuade people to move. In the 2024 Budget, the deduction for employer payments to pension systems under Section 80CCD (2) was raised from 10% to 14% of wage for private sector employers. The benefit of this amendment is only available to taxpayers who choose the new tax system under Section 115BAC.
Here are experts' perspectives on whether the new tax framework would allow for a $50,000 NPS deduction in Budget 2025:
Kinjal Bhuta, Secretary of the Bombay Chartered Accountants' Society (BCAS), states, "The National Pension Scheme was opened for all in 2009 as an investment mechanism for establishing retirement corpus. The deduction was allowed under Section 80CCD of the Income Tax Act of 1961. Deductions under section 80CCD have two components: one where the employer contributes and one where any tax payer can contribute on their own. The deduction for employer contributions is valid under both the old and new taxation regimes; however, the deduction for self-contribution to NPS under section 80CCD (1) has been withdrawn in the new tax scheme. In the 2024 Budget, the deduction for employer contributions to pension schemes under Section 80CCD (2) was doubled from 10% to 14% of pay for private sector employers. The benefit of this modification is solely applicable to taxpayers who choose the new tax system under Section 115BAC. Following this new revision, it is envisaged that the deduction of NPS for self-contribution would be made available for the New Tax system, making the plan more appealing to taxpayers. The government intends to progressively move the bulk of taxpayers from the existing to the new tax regimes. This is evident from the ongoing and consistent efforts made over the last few years to make the new tax regime more tax effective. Allowing NPS deductions under the New Tax Regime could considerably contribute to achieving this goal."
According to Yogesh Kale, Executive Director of Nangia Andersen LLP, "The new tax regime was presented as one that a layman could understand and was subsequently made the default tax regime." However, the new tax regime permits fewer deductions for taxpayers and limits their investment options in terms of tax benefits. Though NPS contributions made by employers up to 10% of employees' salaries are still deductible under section 80CCD(2) of the Income-tax Act, allowing an additional deduction of 50,000 under 80CCD(1B) of the Act would make the new tax regime more profitable. This is considered one of the top predictions for the upcoming budget. While there are speculations about the likely proposals to reduce individuals' tax liabilities, whether the liability will be reduced by allowing some deductions like the one discussed above under the new regime or simply by revising the slabs and slab rates, only time will tell."
Mihir Tanna, associate director of S.K Patodia LLP, "The new tax regime was adopted to make taxpayer compliance easier and the administration of the Income Tax Act by the tax authorities less burdensome. Similarly, in the 2020 budget statement, our Hon'ble FM stated that they will evaluate and rationalise the remaining exemptions and deductions in the following years with the goal of further simplifying the tax system and decreasing the tax rate.
Furthermore, as per Yeeshu Sehgal, Head of Tax Markets at AKM Global, "There appears to be a good chance that Budget 2025 will introduce a Rs 50,000 NPS deduction under the new tax regime, as people are becoming more conscious about their retirement planning than previous generations were." It also accords with the government's emphasis on retirement planning and making the new system more appealing to everybody. Including this deduction will also ensure fairness for individuals who are currently denied this advantage due to their choice of the new regime."
