In a bid to make the National Pension System (NPS) more appealing for potential investors, the government has decided to make NPS withdrawals 100% tax-free. The move is expected to benefit over 18 lakh central government employees, who will now get all their retirement corpus free of tax. The Centre’s contribution to the pension corpus will increase to 14% from the earlier 10%, while the employee’s contribution remains the same 10%, making the total NPS contribution to 24% for each Centre govt employee.
Until now, 40% of the total corpus, which is mandatorily utilized for annuity purchase, was exempted from tax. The remaining 60% corpus can be withdrawn by the user in cash, however, they need to pay tax on the 20% part while 40% is tax exempt. Under the new rules, the entire corpus withdrawal would be tax exempt.
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The changes were announced by finance minister Arun Jaitley who said that no tax will be levied on the NPS withdrawal amount at the time of retirement.
NPS is a retirement pension scheme for public-private employees, which works in two tiers – tier I and tier II. It can be opted by any employee of any organization as well as other working people in India.
The government has still not confirmed the exact date from when the new changes would be effective, but it is expected to be launched in the new financial year, as hinted by Jaitley. According to various sources, the changes in the government’s contribution are expected to go live with the coming year but tax benefit may not be made available before the next financial year. An increased 4% contribution to the NPS of 18 lakh Centre employees will cause an extra burden of around Rs 2,840 crore on the government.
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Along with the pension benefits, the government has also increased the choices for available fund managers in the scheme. Employees would now be able to choose from eight fund managers than the existing three fund options, said economic affairs secretary Subhash Chandra Garg. Besides that, the employees can now choose from more investment options. For instance, they can either go with 25% or 50% equity option or with 100% government bond option.
Government employees can now avail up to 1.5 lakh of income tax deduction under Section 80C for their contribution under Tier-II of NPS. This puts it in the same category as of provident funds like EPF, PPF, etc.
The complete exemption from income tax also brings NPS in the category of EEE (exempt-exempt-exempt) transactions, where there is no tax on input, output, and interest.
