Finance Minister Nirmala Sitharaman did not announce any major tax benefits for the National Pension System (NPS) on February 1.
However, she introduced a key change to make the NPS Vatsalya Scheme more appealing.
Under this scheme, an additional tax deduction of ₹50,000 is now available.
Let’s understand what this tax deduction is and how it benefits taxpayers.
What did the Finance Minister announce on February 1?
During her speech on February 1, Finance Minister Nirmala Sitharaman stated that the tax benefit under sub-section 1B of section 80CCD of the Income Tax Act, 1961, will now also apply to contributions made under the NPS Vatsalya Scheme.
This means parents or guardians contributing to a child’s NPS account under this scheme can claim an extra ₹50,000 deduction under section 80CCD(1B).
Available only under the old tax regime
It is important to note that this tax deduction is only available to taxpayers who opt for the old income tax regime.
The government introduced the NPS Vatsalya Scheme on September 18, 2024, though it was first announced in last year’s Union Budget.
This scheme allows parents or guardians to start an NPS account for their child.
What is the NPS Vatsalya Scheme?
This scheme is designed for minor children. Once the child turns 18, the NPS account is transferred to their name, and the accumulated funds are moved to an NPS Tier-1 account.
The scheme aims to build a substantial financial fund for children in the long run.
To participate, parents or guardians must invest at least ₹1,000 annually, with no upper investment limit.
No benefit under the new tax regime
Many taxpayers believe the government is promoting the new tax regime.
However, the additional tax deduction under NPS Vatsalya is only applicable to the old regime, raising concerns.
Critics argue that if the government genuinely wanted to offer this benefit, it should have extended the ₹50,000 deduction under section 80CCD(1B) to the new tax regime as well.
