Increase Your Tax Savings Under NPS New Tax Regime

The Union Budget 2024-25 has brought great news for salaried individuals! If you’re under the New Tax Regime, you now have an enhanced opportunity to save on taxes through the National Pension System (NPS). Let’s understand the changes and how you can make the most of them.

The Union Budget 2024-25: A Game-Changer for NPS

The Finance Minister’s announcement increased the deduction limit for employer contributions to NPS. Earlier capped at 10% of the employee’s basic salary, it has now been raised to 14% for private-sector employees, bringing them on par with government employees. This enhanced deduction applies exclusively under the New Tax Regime.

NPS Tax Benefits Under the New Tax Regime

Under the New Tax Regime, there are significant tax-saving opportunities. The standout is Section 80CCD(2), applicable for corporates that have registered for NPS which allows you to claim a deduction for your employer’s contributions to NPS.

Key Updates:

Higher Deduction Limit: The employer’s NPS contribution deduction limit has been raised from 10% to 14% of your (basic + DA) salary. This benefit applies to both public and private sector employees who opt for the New Tax Regime.
Exclusive New Tax Regime Perk: While government employees already had the 14% benefit, this budget ensures private-sector employees enjoy the same advantage under the simplified tax regime.
Enhanced Social Security: This increase aims to boost retirement savings while providing much-needed relief in taxable income for employees.

How Does the 14% Deduction Help You?

Imagine you earn a basic salary of ₹10,00,000 annually, along with a Dearness Allowance (DA) that totals ₹2,00,000. Under the earlier 10% limit, your employer’s contribution of ₹1,00,000 would have been deductible based on your Basic + DA, which is ₹12,00,000. This means that the deductible limit would have been ₹1,20,000 (10% of ₹12,00,000).

With the new 14% limit, contributions up to ₹1,68,000 (14% of ₹12,00,000) are now deductible. This increase in the deductible limit reduces your taxable income further, allowing you to pay less tax!

What do You need to Know About NPS Taxation?

Under the Old Tax Regime: NPS contributions provide multiple tax benefits under Sections 80CCD(1), 80CCD(1B), and 80CCD(2). This includes self-contributions and employer contributions, offering a broader range of deductions.
Under the New Tax Regime: While deductions like 80CCD(1) and 80CCD(1B) are not available, Section 80CCD(2) ensures tax savings for employer contributions.
Pro Tip: If you’re a salaried individual with access to employer NPS contributions, opting for the New Tax Regime could be a smart move, especially with the increased 14% limit.

Who Benefits the Most?

The higher deduction primarily benefits: Private-Sector Employees: They can avail of the same benefits as government employees under the New Tax Regime.
High Earners: Individuals with a high basic salary can maximize their savings under this scheme, as the 14% limit is calculated based on the basic salary and dearness allowance. However, the maximum permissible limit is capped at ₹7.5 lakh.

How to Maximize Tax Savings?

Talk to Your Employer: Ensure your employer contributes to your NPS account. This contribution is a win-win—reducing your taxable income while securing your retirement.
Leverage Section 80CCD(2): This section now allows a substantial deduction. Make sure you’re fully aware of your eligible amount based on your employer’s contributions.

Conclusion

The Union Budget 2024-25 has elevated the National Pension System to a must-consider tax-saving tool under the New Tax Regime. With the deduction for employer contributions increased to 14%, salaried individuals can now enjoy greater tax savings while building a robust retirement fund.

If you’re planning your taxes, start exploring how NPS fits into your strategy. Visit your nearest UTI Pension Fund branch to make an informed decision and maximize your benefits under the New Tax Regime.

Remember, a little planning today can lead to a secure and tax-efficient tomorrow!