In a bid to spread the net wider and make the National Pension System (NPS) scheme more attractive, the government has brought private sector employees at par with government staffers in terms of the tax gains that the pension scheme offers.
The Budget 2024 has proposed to increase the tax deduction limit on private sector employers’ contribution to their employees’ NPS, from 10% to 14% of the basic salary. This means that all private sector employees can now avail of tax deduction of 14% on employer’s contribution to the NPS under Section 80CCD (2). The existing limit is 10% of the basic salary for private employees, and 14%for Central and state government staffers. For instance, before the Budget, if your basic salary had been Rs.1 lakh, then 10% of this or Rs.10,000 would be eligible for deduction in your hands. Now, this amount will be Rs.14,000. Remember, that this higher tax benefit is available only to employees opting for the new tax regime.
This move is intended to have a three-fold impact: increase tax-savings for employees (see table), help them build a bigger retirement corpus, and enhance NPS penetration. “The ground rules have been harmonised among government and non-government employees, which is a positive step,” says Sriram Iyer, CEO, HDFC Pension Management. “From the taxation perspective, employees will benefit from tax savings. More importantly, the 40% increase in contribution will have a significant impact on the terminal value of the retirement corpus,” he adds.
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Agrees Dinesh Rohira, CEO & Founder, 5nance.com. “With the employers’ contribution rising to 14%, employees will have extended savings. This will help in retirement planning, working as an option that is at par with the Provident Fund,” he says.
Whether this tax bait helps widen the NPS subscriber base remains to be seen. “The rise from 10% to 14% in deduction limit has increased visibility for the NPS and can help raise awareness in corporates, where even senior people do not know about this option,” says Iyer. Agrees Mrin Agarwal, Founder, Finsafe India. “While it’s good that the limit has been raised, it may not increase adoption as employees need to be educated in a big way. Also, the benefit is only for the salaried opting for the new tax regime,” she says.
Another reason for low enthusiasm for NPS is the mandatory contribution to the EPF, which is regarded by many as a de facto retirement corpus. Contributing to the NPS for the same purpose reduces their take-home salary. “When 12% of my salary is already deducted for the EPF, why should I put in more in the NPS and cut my take-home pay?” asks Varun Sahay, a software engineer in a Delhi-based IT company.
“There’s no competition between the NPS and EPF as employees can contribute to both and build a 3-4 times bigger corpus while earning 3-4% higher returns via marketlinked options in the NPS,” counters Rohira.
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NPS Vatsalya: Novel product or non-starter?
To kickstart retirement savings for children, a new scheme, NPS Vatsalya, has been announced. This will enable contribution by parents and guardians for minors, and on the child attaining majority, the plan can be converted to a normal NPS account.
“It provides a very long duration for reaping the compounding benefits and accumulate a huge bounty at later age. This can be a good way to plan a better future for kids who may not opt for a service segment in future,” says Dinesh Rohira, CEO & Founder, 5nance.com. Agrees Sriram Iyer, CEO, HDFC Pension Management. “It’s a good move to help the child start his retirement journey. Even if a parent starts when the child is 10 years old, by the time he starts working, it can be a solid foundation for the compounding journey after that,” he says.
However, some experts are questioning the utility of a product with the long lock-in period that does not allow the parent to use the corpus for crucial goals like child’s education, given the high education inflation of 11-12%. “Parents are struggling to save for their own retirement, so it might be a bit of a stretch to expect them to save for their kids’ retirement. The need of the hour is a market-linked product that allows withdrawals only for the child’s education,” says Mrin Agarwal, Founder, Finsafe India.
Though the NPS allows partial withdrawals, it is only 25% of the corpus after three years of joining, and only three times during the entire tenure. Premature exit before 60 years with 100% withdrawal is allowed only if the corpus is less than Rs.2.5 lakh. This amount would be too less for any of the children’s goals.
“In its current form, there won’t be any uptake,” says Agarwal. Agrees Rohira, “It’s a vanilla product with a lockin, which does not make it very attractive and it may not take off. However, the government may optimise it and introduce new features later.” “This is just a start and there may be more subscriberfriendly features as we take it to the market. The regulator is proactive and open to feedback,” adds Iyer.
