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Business News/ Money / Personal Finance/  How should you manage your NPS Tier 1 account under the new tax regime?
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How should you manage your NPS Tier 1 account under the new tax regime?

The Pension Fund Regulatory and Development Authority manages the National Pension System (NPS), a government-backed pension programme.

In accordance with Section 80C of the Income Tax Act, NPS Tier 1 accounts are eligible for a deduction of up to ₹1.5 lakh from taxable income and an additional deduction of up to ₹50,000 under Section 80CCD (1B).Premium
In accordance with Section 80C of the Income Tax Act, NPS Tier 1 accounts are eligible for a deduction of up to 1.5 lakh from taxable income and an additional deduction of up to 50,000 under Section 80CCD (1B).

The Pension Fund Regulatory and Development Authority manages the National Pension System (NPS), a government-backed pension programme. Nirmala Sitharaman, the finance minister, announced significant adjustments to the new tax regime in Budget 2023, including adjustments to tax rates, slabs, and more. Most significantly, the new regime would be the default taxation system for submitting income tax returns (ITRs) in FY24. In accordance with Section 80C of the Income Tax Act, NPS Tier 1 accounts are eligible for a deduction of up to 1.5 lakh from taxable income and an additional deduction of up to 50,000 under Section 80CCD (1B). However, these two deductions are only valid under the old tax regime hence since the new tax regime is the default one starting FY24, how NPS Tier 1 investors can manage their account, let’s know from our industry experts.

S. Ravi, Former Chairman of BSE(Bombay Stock Exchange)

As the new tax regime has come into effect, taxpayers need to be mindful of the changes and opportunities available to optimize their taxes. Here are some tips to help you do just that:

1. Plan your investments: Invest in instruments that are eligible for tax deductions, such as Public Provident Fund (PPF), Equity-Linked Saving Scheme (ELSS), National Pension Scheme (NPS), and tax-saving fixed deposits. This will not only help you save taxes but also earn good returns.

2. Claim all tax deductions: Ensure that you claim all the tax deductions available to you. For example, deductions on home loans, education loans, health insurance premiums, and medical expenses. These can significantly reduce your taxable income.

3. Use Section 80C to your advantage: Utilize Section 80C to its fullest by investing in schemes that qualify for deductions, such as PPF, ELSS, NPS, and tax-saving fixed deposits. The maximum limit for this section is 1.5 lakh, so ensure that you invest accordingly.

4. File your tax returns on time: Ensure that you file your tax returns on time to avoid any penalties or interest payments. Also, e-filing your returns makes the process faster and more convenient.

Sujit Bangar, Founder, Taxbuddy.com

When investing in the National Pension System (NPS) Tier 1 account, individuals should consider their tax liabilities carefully and take advantage of Section 80CCD (2), which allows for a deduction for the employer's contribution to the NPS account. The maximum deduction allowed varies for the private sector and government employees, and any excess contributions over Rs. 7.5 lakh per year will be taxable.

Contrary to popular belief, Section has an upper limit which is the lowest of three conditions: the employer's contribution amount, 10% of Basic+DA (or 14% for central government employees), and the gross total income. This deduction is separate from the Section 80C limit and is not applicable to self-employed individuals. You will not be able to avail of the tax benefits offered by NPS under sections 80CCD(1) & 80CCD(1B) in 2023, as the limits of Section 80CCD(1) and Section 80CCD(1B) are included within the overall limit of Section 80C.

Suresh Surana, Founder, RSM India

The provisions pertaining to deduction with respect to contribution to NPS are as follows:

Nature of ContributionApplicable ProvisionsTax Deduction LimitAvailable in Old Tax RegimeAvailable in the New Tax Regime u/s 115BAC
Individual/ Employee’s Contribution to NPS80CCD(1)

Section 80CCD(1) of the IT Act provides for deduction with respect to the NPS contribution which would be lower of the following:

(i)        Individual/ employee’s contribution to the NPS

(ii)      10% of the Salary/ 20% of the Gross Total Income

The aggregate deduction under section 80C, 80CCC (Contribution to Pension fund) and 80CCD (1) would be subject to the threshold limit of Rs. 1,50,000.

YesNo
Additional contribution80CCD(1B)

An additional deduction of Rs. 50,000 would be available u/s 80CCD (1B) of the IT Act in respect of any contribution on which the overall threshold limit of Rs. 1,50,000 is not applicable.

It is pertinent to note that when claiming deduction under this section, one should ensure that there is no duplication of claim, i.e. no taxpayer should claim the same contribution amounts under both sections 80CCD(1B) and 80CCD(1).

YesNo
Employer’s Contribution to NPS80CCD(2)

Section 80CCD(1) of the IT Act provides that employer’s contribution to NPS would first be taxable in the hands of the employee under the ‘salary’ head and thereafter deduction with respect to such NPS contribution which would be lower of the following:

(i)        Employer’s contribution to NPS

(ii)      10% (14% in case of Government employer) of the Salary

It is pertinent to note that the aggregate upper limit of Rs. 7.5 lakhs is applicable in respect of employer’s contribution in a year to NPS, superannuation fund and recognized provident fund of the employee and any excess contribution would be taxable. Any contribution in excess of the

threshold limit of Rs. 7.5 lakhs would be taxable as perquisite u/s 17(2)(ia) of the IT Act.

YesYes

Thus, only the employer’s contribution made to NPS could be claimed as deduction by the employee in case of opting for new tax regime u/s 115BAC of the IT Act and accordingly, the deduction with respect to the employee’s contribution u/s 80CCD(1) and 80CCD(1B) would not be available under the new tax regime.

Rajeev Gupta- Business Head, E-Governance Services, Religare Broking Ltd

Under the new regime, where the government has proposed to increase the tax rebate limit to 7 lakh and also eliminated various deductions such as 80CCC, 80EE, 80EEA, 80EEB, 80G etc, we recommend managing NPS contributions through corporate route. When you invest in NPS through your employer, you get maximum tax deduction benefits. You become eligible for additional tax deduction up to 10% of salary (Basic + DA) in case of private company employees and up to 14% for central government employees under Section 80 CCD(2). Other NPS benefits such as 80 CCD1 and 80 CCD (1B) are available on self-contribution in the old regime.

Further lump sum withdrawal up to 60% of the corpus at maturity, i.e at the time of retirement, is 100% tax exempt. The annuity contribution is tax free and pension income is taxed at the applicable tax slab.

Archit Gupta, Founder and CEO, Clear

Especially while investing in Tier 1 account - Only the employer contribution in NPS is deductible u/s 80CCD(2). So for tax saving purpose the investing in NPS needs to be considered judiciously. While investing in NPS not just the tax aspect but other aspects such as growth of corpus, overall financial goals must be considered.

Suman Bannerjee, CIO, Hedonova

Investing in NPS Tier I offers three tax deductions:

Deduction of up to 1.5 lakh from taxable income under Section 80C.

Additional deduction of up to 50,000 under Section 80CCD (1B) of the Income Tax Act, exclusively available through NPS investment.

The third deduction is in the form of employer's contribution of up to 10 per cent of salary (basic component + dearness allowance) to the NPS Tier I account. It is not considered taxable income, which reduces the tax burden. In the case of government employees, it's 14 per cent instead of 10 per cent.

Abhishek Soni, Co-founder & CEO of Tax2win

As per the new tax regime, taxpayers are not eligible to claim the deductions under Section 80C and investment in NPS u/s 80CCD (1) and Section 80CCD (1B) but they are eligible to claim a deduction under Section 80CCD(2) i.e. contribution by the employer. There are no tax benefits here but it can help secure your retirement if you struggle with discipline in saving. Review regularly, balance your portfolio, and stay true to your retirement goals to make the most of your NPS contributions under the new tax regime.

C.A. Ms. Ashwini Khade- Principle Consultant - Catalyst Trusteeship Ltd

Being the social security initiative by the government of India National Pension Scheme (NPS) holds the utmost importance and has been a reliable scheme for private sector employees in need of a regular pension post-retirement. While there is no such tax benefit for NPS contribution employees, under section 80C of the new tax regime, employees can arrange their salary structure in such a way that their employer will contribute up to 10% of their basic salary. This deduction is in addition to the exemption of employee contribution of Rs. 50,000.

Satyen Kothari, the founder and CEO of Cube Wealth

Under the new tax regime, NPS contributions are eligible for a tax deduction of up to 10% of salary including dearness allowance (DA), and further deductions of up to Rs. 50,000 under Section 80CCD(1B). When investing in a Tier 1 account, individuals should consider the following:

1. Assess the investment horizon and risk appetite before choosing between the two available investment options - Active and Auto choice.

2. Regularly monitor the performance of fund managers and switch between managers if required.

3. There are limits on the percentage of investment in equity instruments based on the age of the individual, which need to be closely monitored.

Somya Srivastava, founder of Prayatna Microfinance

Managing NPS (National Pension System) contributions under the new tax regime requires a careful consideration of several factors. The NPS is a voluntary retirement savings scheme that offers tax benefits under both the old and new tax regimes. However, the tax benefits differ under each regime, and it is important to understand these differences to make informed investment decisions.

Under the new tax regime, individuals can choose to forego deductions and exemptions and pay tax at lower rates. However, this means that they will not be able to claim deductions for contributions to the NPS Tier 1 account. This account has a lock-in period until retirement, and withdrawals are restricted.

Given this scenario, it is advisable to evaluate the tax implications and investment horizon before making NPS contributions under the new tax regime. If an individual expects to be in the lower tax bracket after retirement, they may benefit from contributing to the NPS Tier 1 account under the old tax regime. This will enable them to claim tax deductions and build a retirement corpus that is taxed at a lower rate after retirement.

On the other hand, if an individual expects to be in the higher tax bracket after retirement, they may benefit from contributing to the NPS Tier 1 account under the new tax regime. This will enable them to invest in equity and debt instruments and build a retirement corpus that is taxed at a lower rate than other investment avenues.

In conclusion, Somya Srivastava advises that managing NPS contributions under the new tax regime requires careful consideration of an individual's tax implications and investment horizon. It is advisable to seek professional guidance and evaluate the tax benefits under both the old and new tax regimes before making investment decisions.

Akhil Chandna, Partner, Tax, Grant Thornton Bharat

The National Pension System (NPS) offers tax benefits under both old and new tax regimes in India. Tier 1 NPS account is primarily meant for retirement savings where an individual can make a minimum contribution of INR 500 while opening the account. Under the new tax regime, the contribution made by employer towards Tier 1 NPS account is eligible for tax deduction under section 80CCD (2) of Income Tax Act, 1961 without any limit. However, the employer’s contribution under section 80CCD(2) is restricted to up to 10% of employee’s basic pay plus dearness allowance of salary in any particular financial year.

Therefore, individuals in employment may check if the employer provides the NPS benefit as part of the compensation structure and accordingly decide to opt for the same which will allow for deduction of such employer contribution.

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ABOUT THE AUTHOR
Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 06 Apr 2023, 07:25 PM IST
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