“NPS is a fair option for disciplined retirement savings for those who will not get any worthwhile pension from their employer or any other source, especially for those looking for a mix of equity and debt exposure,” says Sanjeev Govila, CEO of financial advising firm Hum Fauji Initiatives.
The tax deduction: A Valuable Opportunity
Investing in the National Pension System (NPS) is not only a smart financial move, but it also offers an exclusive tax benefit that makes it a must-have investment option. can claim a tax deduction of up to 10% of their salary (basic + dearness allowance) Section 80CCD(1), within the overall limit of Rs 1.5lakh under Section 80C. Furthermore, contributions up to Rs 50,000 are eligible for an additional tax benefit under Section 80CCD(1b), which is over and above the deduction available under Section 80C.
While individuals can invest any amount they choose in the NPS, the tax deduction is capped at Rs 50,000 per year. Financial planners believe that this limit is too low and should be increased to encourage people to invest more their retirement. The current limit is deemed insufficient, especially considering the rising cost of living and longer life expectancies. When converted to actual tax savings, the deduction amounts to only Rs 1,250 per month, even in the highest tax bracket, which may not be a strong enough incentive for many investors.
Retirement planning is crucial for financial stability in the golden years. Govila emphasizes the need to restructure policies to ensure better financial protection for retirees. Sadagopan suggests that tax incentives should not be the sole driver for investment decisions. However, he believes that an additional Rs.1.5-lakh investment limit under the National Pension System (NPS) could significantly improve retirement funding, as India lacks alternative social security measures, making retirement a self-financed endeavor.
The upcoming Union Budget 2024 offers taxpayers another opportunity to reduce their tax liability by investing up to Rs 50,000 in their NPS Tier I accounts. However, financial experts argue that this amount is too modest to significantly contribute to a retirement fund. They suggest raising the deduction limit to motivate individuals to save more for their golden years.
In the financial year 2-16, a distinct additional deduction was introduced for investments in the National Pension System (NPS). This allows taxpayers to claim an extra deduction of up to Rs 50,000 under Section 80CCD (1B) of the Income-tax Act, which is exclusive to NPS. Other investment options only qualify for deductions under Section 80C, without this additional Rs 50,000 benefit. Nevertheless, financial planners believe that the deduction limit for NPS should be raised to further encourage retirement planning and savings among the populace.
