NPS - Business Outrank

In Budget 2025, Finance Minister Nirmala Sitharaman has announced that individuals earning up to ₹12 lakh per annum will not pay income tax. However, there are ways in which salaried individuals can stretch this limit further with the help of standard deduction and National Pension System (NPS) contributions. The standard deduction is ₹75,000 and together with about ₹96,000 from NPS contributions, people can bring down the tax exemption limit to ₹13.7 lakh per annum. This is because, under Section 80CCD(2), employees can claim tax deduction up to 10% of basic salary invested in NPS, and central government employees can claim up to 14%. For example, say an individual earns ₹13.7 lakh per annum and has a basic salary of ₹6.85 lakh (50%), contributing 14% to NPS would mean contributing ₹95,900. The standard deduction of ₹75,000 can then be added to this, thus making the entire ₹13.7 lakh tax exempt, as long as the employer includes NPS benefits in the employee’s package. Although it has been in existence for almost a decade, only 2.2 million people have chosen the NPS. The main reasons for this are the extended lock in period and restricted withdrawal flexibility. You can only withdraw 60% of the corpus at maturity while 40% has to be used to buy an annuity. However, NPS has its place. It outperforms many mutual funds because it has significantly lower fund management charges of 0.09%, as against 1-1.5% for mutual funds, thus making it a good long term investment.

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