The Union Budget 2025 has introduced significant reforms that can benefit salaried individuals, particularly in terms of tax savings and retirement planning. One of the key changes is the increased attractiveness of the National Pension System (NPS) compared to the Employees’ Provident Fund (EPF) under the new tax regime. Let’s explore why NPS has become a more appealing option for tax savings.
Higher Tax-Free Income Limit
Under the new tax regime, the NPS allows salaried individuals to earn up to ₹13.7 lakh per year tax-free, which is higher than the standard ₹12 lakh limit. This additional tax-free income is made possible through a combination of the ₹75,000 standard deduction and NPS investments. In contrast, the EPF’s tax-free annual income limit remains at ₹12 lakh.
Increased Employer Contribution Benefits
The 2024 budget introduced Section 80CCD(2), which allows salaried employees to invest up to 14% of their basic salary in the NPS tax-free, an increase from the previous 10%. This higher limit provides greater tax-saving opportunities compared to the EPF, where employer contributions are tax-exempt only up to 12% of the salary.
Flexibility and Control
One of the key advantages of NPS over EPF is its flexibility. The NPS allows investors to allocate their funds across various asset classes such as equities, corporate bonds, and government securities. Investors can also switch between these fund options without any tax implications, providing greater control over their investment strategy.
Lower Management Fees
The NPS charges significantly lower fund management fees compared to other retirement savings schemes, including the EPF. Over the long term, this can result in considerable savings and higher returns for NPS investors.
Market-Linked Returns
While the EPF offers a fixed interest rate (currently 8.25% per year), the NPS provides market-linked returns. This means that NPS investors have the potential to earn higher returns over the long term, especially if they opt for a more aggressive asset allocation strategy.
Conclusion
While both NPS and EPF have their merits, the recent changes introduced in the Union Budget 2025 have made NPS a more attractive option for tax savings under the new tax regime. The higher tax-free income limit, increased employer contribution benefits, greater flexibility, lower management fees, and potential for higher returns make NPS a compelling choice for salaried individuals looking to optimize their tax savings and retirement planning strategies.
However, it’s important to note that the choice between NPS and EPF should be based on individual financial goals, risk appetite, and overall retirement planning strategy. For those seeking a balance between stability and growth potential, a combination of both NPS and EPF might be the optimal approach.
