Budget 2024: Deduction limit increased from 10% to 14%; introduces NPS Vatsalya for minors

One of the government's objectives is to provide social security benefits to citizens. In Budget 2024, the Finance Minister made two announcements towards this objective. These include proposals to raise the limit for employer contribution towards employee's NPS to 14% from the earlier 10%, and the introduction of NPS Vatsalya for minors. Let us understand the details of these two proposals.

Increase in employer’s NPS contribution to 14%

Earlier, under Section 80CCD(2), Central and State Government employees were allowed a deduction of 14% of the salary for employer contribution towards the employee’s NPS account. The deduction for other employees was limited to 10% of the salary.

In the Budget 2024 speech, the Finance Minister proposed to increase the limit on the amount of deduction allowed to an employer for contribution to employee’s NPS from 10% to 14% of the employee salary. Under the new tax regime, an employee will be allowed a deduction of 14% of the salary for the employer’s contribution to their NPS account.

The Finance Minister has proposed to extend the 14% deduction benefit, earlier available to government employees only, to employees of all categories. The additional deduction of 4% of the salary will make NPS more attractive to employees in the private sector, public sector banks and undertaking. Also, as the additional 4% deduction is available only in the new tax regime, more employees will consider shifting to the new tax regime. Thus, with this proposal, the government aims to meet the twin objectives of attracting more employees towards the NPS and the new tax regime.

How much will be the tax savings?

Let us look at how much individual taxpayers will save with the increase in the deduction limit. If an individual has a basic pay of Rs. 1,00,000, at a 10% deduction, the employer will contribute Rs. 10,000 per month to the employee's NPS account. On an annual contribution of Rs. 1,20,000, the employee will save Rs. 24,960 in net taxes if they fall in the 20% tax bracket in the new tax regime.

With an increase in the deduction limit to 14%, the employer will contribute Rs. 14,000 per month to the employee’s NPS account. On an annual contribution of Rs. 1,68,000, the employee will save Rs. 34,944 in net taxes if they fall in the 20% tax bracket.

So, in the above scenario, the additional net tax saving for the employee will be Rs. 9,984.

Increasing the deduction limit to 14% will give dual benefits to employees. It will ensure higher tax savings for them in the short term and a higher retirement corpus getting accumulated in the pension fund in the long term.

NPS Vatsalya

The Finance Minister proposed the introduction of NPS Vatsalya for minors. In this plan, the parents and guardians can make contributions for minors. When the minor attains the age of majority, the plan can be converted seamlessly into a normal NPS account. By then, a strong foundation would have been laid. The individual can then take forward the regular NPS account and continue with it by investing their own money.

NPS Vatsalya will help parents to do financial planning for their children right from a young age. Parents can encourage children to deposit their savings from pocket money and/or other sources into the NPS Vatsalya account. It can help inculcate the habit of saving and investing in children from their early years. While this is a good step from the Government in the right direction, the scheme details are awaited.

With the Sukanya Samriddhi Account (SSA), parents can accumulate money for their girl child’s higher education and marriage. With the NPS Vatsalya, parents can set the foundation for their child’s retirement fund. Thus, with these two financial schemes, parents can take care of their children’s basic needs and build a bright future for them.

Review of NPS

During her budget speech, the Finance Minister also mentioned that the Committee doing a review of the NPS has made considerable progress in its work. She said, “I am happy that the Staff Side of the National Council of the Joint Consultative Machinery for Central Government Employees have taken a constructive approach. A solution will be evolved which addresses the relevant issues while maintaining fiscal prudence to protect the common citizens”. We can expect more updates on this in the coming days.

NPS reach set to increase with budget proposals

With her Budget 2024 proposals, the Finance Minister has increased the National Pension Scheme (NPS) attractiveness. The increase in the deduction limit from 10% to 14% of salary for employees of all categories and the introduction of NPS Vatsalya will make more people opt for NPS and increase its penetration among the masses. A wider reach of NPS will go a long way in promoting social security for citizens, which is the government's objective.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.