PFRDA pitches for doubling tax break for NPS subscribers in the upcoming Budget

Pension regulator PFRDA has urged Finance Minister Nirmala Sitharaman to increase the additional tax deduction limit on investments under the National Pension Scheme (NPS) from $50,000 to ₹1 lakh in the upcoming budget for 2023-24.

This proposal – to enhance the limit under Section 80 CCD (1B) – should be music to the ears of individual NPS subscribers as this tax break window of €50,000 is currently available on top of the Section 80C limit of 1.50 lakh already available to salaried individuals.

capital gains treatment

To further improve the deal for NPS subscribers, PFRDA also enhanced capital gains treatment as available to the mutual fund industry for liquidated gains from NPS Tier-II investments, sources close to the development said.

Also, the pension regulator has introduced that NPS will be excluded from the required assessment of employer contribution in respect of salaried employees.

When employers make an NPS contribution to employees, this amount is currently added as a condition for tax purposes and allowed as a deduction. Now, PFRDA wants to exclude NPS from the individual account, since last year’s budget had introduced an aggregate cash cap of Rs 7.5 lakh for NPS, pension funds and recognized provident funds combined, the sources added.

A higher tax break for business expenses

PFRDA also wants to offer employers a better NPS deal and is seeking an improved tax cut for them for their NPS contributions to employees.

The current limit has been increased from 10 percent to 14 percent for claiming the contribution made by the business owner as business expenses, the authority has proposed in pre-budget recommendations to the Ministry of Finance.

Standard income deduction

The authority also recommended as part of its previous budget proposals to allow for a “standard deduction” in respect of annual income received by corporate retirees from an annuity plan purchased through the NPS.

Tax equalization on employer contributions

In another significant proposal, PFRDA has called for tax parity on the employer contribution for all NPS subscribers. It has recommended that the tax deduction limit on employer contribution be increased from 10 per cent to 14 per cent for all residents on an equal footing with central and state government employees.

The idea is to bring employees of companies and self-employed individuals on an equal footing with employees of the central and state government.

It should be noted that since fiscal year 2020, central government employees have been eligible for a 24 percent deduction (employee contribution of 10 percent and employer share of 14 percent) for NPS contributions.

These benefits have been extended for state government employees from April 1, 2022. However, for private and public sector employees, the cap remains at 20 percent (10 percent of the employer and employee contribution each). The exception is public sector banks which have already raised the employer’s share to NPS to 14 percent, bringing the total discount contribution of bank employees to 24 percent.

PFRDA is of the opinion that there should be tax parity between sectors within the NPS. The full contribution of 14 percent by the central or state governments for their employees is exempt from tax. The sources said the pension regulator wants this same benefit to be extended to the corporate sector as well as individuals subject to the requirement that NPS be the only pension benefit for these subscribers.

tax parity