New Incentives to join NPS and NPS Vatsalya

The budget has encouraged retirement planning by offering additional tax benefit on NPS contributions and introducing a new option in the pension scheme for minor children.

Under the section 80CCD (2) up to 10% of your basic salary put in NPS is tax free. For instance, if your basic salary is Rs 1 lakh, then Rs 10,000 (10% of basic pay) put in the NPS by your employer on your behalf, is tax free. Now, this deduction will increase to Rs14,000.

Till now, only government employees were eligible for 14% deduction, but now it has been extended to the private sector.

While the new tax regime offers the NPS benefit only under Section 80CCD (2), the old tax regime allows three deductions under Sections 80CCD (1) (Rs1.5 lakh), 80CCD (1B) (Rs50,000) and 80CCD (2). However, the higher limit of 14% is only for those who opt for the new tax regime.

With the employers’ contribution increasing to 14%, employees will have extended savings now. This will help in retirement planning, works as an option that is at par with the Provident Fund as per the given limits for employees, and serves an incentive to increase the tax-paying user base for the government.

In the other major step that encourages long-term savings for children by their parents, the budget has announced a new scheme, NPS Vatsalya. Under this, parents and guardians can contribute in the name of minor children below 18. After they turn 18, the plan can be converted seamlessly into a normal NPS account.

NPS Vatsalya is a notable innovation that allows parents or guardians to contribute to a child’s pension from birth, ensuring a strong foundation for future retirement savings through compounded returns.