One of the abiding financial concerns of the common man in India is financial security in old age. Finance Minister Nirmala Sitharaman took a small step in this direction on July 23 during the budget.
She has raised the tax benefit from 10% to 14% of the basic pay that is available to any contributor in the private sector. This will encourage investment in the NPS (National Pension System), and thereby, boost retirement planning. NPS pays the contributor a monthly pension as well as a lump sum at the age of retirement.
Private sector on a par
This step brings those employed in the private sector at par with those in the public sector, who were already eligible for this limit of tax exemption.
The tax deduction is available under section 80CCD(2) of the Income Tax Act 1961. For the sake of convenience, let’s consider an employee with a basic income Of Rs 1 lakh. The employer could earlier contribute Rs 10,000 – or 10% of the basic salary to the NPS on behalf of the employee – which would have been exempt from income tax. This amount is now raised to Rs 14,000.
Let’s see what is the additional income tax savings that an NPS contributor can make following the rise in tax deductibility ceiling.
Basic pay of Rs 3 lakh
Consider a contributor who has a basic pay of Rs 3 lakh a year or Rs 25,000 a month. So far, he/she was eligible for a maximum relief of Rs 30,000 (10% of basic). With the ceiling rising to 14%, the new limit will be Rs 42,000. It will result in tax saving of Rs 2,184.
Basic pay of Rs 6 lakh
If the basic salary is doubled to Rs 50,000 the new amount of tax saved would be Rs 8,736 instead of Rs 6,240 earlier.
Basic pay of Rs 12 lakh
For a taxpayer who has a basic income of Rs 100,000, the enhanced tax saving will be Rs 34,944 instead of 24,960 earlier.
Only for the new tax regime
What is very significant is that the enhanced tax deduction benefit will be available only for those who opt for the new tax regime. Those who prefer to stay in the old regime will not get this benefit.
Any Indian between 18 and 70 years of age can open an NPS account. It is open to both resident, non-resident Indians.
The income tax deductibility ceiling of the National Pension System has been raised in the budget. This measure would benefit any contributor. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
