Enhancing NPS: Expectations for Budget 2025

As the Union Budget 2025 approaches, financial experts are urging the government to make significant changes to the National Pension System (NPS). The NPS is a crucial tool for retirement savings in India, yet many individuals remain unprepared for their financial futures. Finance Minister Nirmala Sitharaman is expected to address these concerns in her upcoming budget speech. Experts believe that enhancing tax incentives for the NPS could make it a more attractive option for investors, particularly among small savers and middle-income earners.
The Retirement Challenge in India
India faces a pressing retirement challenge. Many citizens lack adequate financial preparation for their later years. This issue is compounded by a growing population of retirees who need sustainable income sources. The NPS was introduced to address this gap, providing a structured way for individuals to save for retirement. However, its current structure may not be enough to encourage widespread participation.
Rajani Tandale, Senior Vice President at Mutual Fund 1 Finance, emphasizes the need for improved tax incentives to boost the NPS’s appeal. She argues that the existing tax benefits are insufficient to motivate individuals to invest in their retirement. Many potential investors are deterred by the current limits on tax deductions, which do not align with the financial realities faced by average citizens. By increasing these limits, the government could encourage more people to consider the NPS as a viable retirement savings option.
Proposed Changes to Tax Deductions
One of the key recommendations from financial experts is to increase the Section 80CCD(1B) deduction ceiling from Rs 50,000 to Rs 1 lakh. This change would incentivize taxpayers to invest more in the NPS, thereby enhancing their long-term retirement savings. Tandale believes that this adjustment is particularly important for small savers and middle-income earners, who often struggle to set aside adequate funds for retirement.
Additionally, experts suggest that the Section 80CCD(2) deduction limit should be raised. Currently, this limit is set at 10% of the basic salary under the old tax regime and has been increased to 14% under the new tax regime. Tandale advocates for a further increase to 20% of the basic salary. This change would make the NPS more appealing to employees in the private sector, who may have more flexibility in their retirement planning.
Addressing Annuity Purchase Requirements
Another significant barrier to NPS participation is the mandatory annuity purchase requirement. Many potential investors find this requirement unappealing due to the low returns and high taxation associated with annuities. Tandale proposes introducing a systematic withdrawal option as an alternative or supplement to annuities. This would allow retirees to access their funds gradually, providing more control over their finances during retirement.
By offering a systematic withdrawal option, the NPS could attract a broader range of investors. This flexibility would enable retirees to manage their funds more effectively, reducing the financial strain that often accompanies retirement. Furthermore, experts recommend that the government consider reducing the tax burden on annuity income. This change would enhance post-retirement financial security and encourage more individuals to invest in the NPS.
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