The Union Cabinet recently approved a host of changes in NPS or National Pension Scheme. Apart from higher government contribution for central government employees covered under NPS, the Cabinet also made withdrawal from NPS completely tax-free. The new rules are expected to come into effect from April 1 next year once amendment to the Finance Bill is passed. For review of NPS rules governing government employees, the 7th Pay Commission had recommended for setting up of a committee of secretaries and the panel had submitted its report this year. Accordingly, based on the recommendations of the committee, the draft Cabinet note was placed before the Cabinet for its approval.
NPS rule changes explained in 10 points
NPS, which was initially introduced for government employees, was thrown open to all citizens of the country, including unorganised sector workers.
NPS: Here are 10 things to know about the changes
1) The Cabinet approved a proposal to make NPS fully tax-free on withdrawal. Subscribers will get full tax exemption on the 60% of the corpus that an investor is allowed to withdraw on maturity.
2) Currently, on retirement or on reaching the age of 60, NPS subscribers are allowed to withdraw 60% of the corpus while 40% has to be invested in annuity plans for getting regular pension payouts. Out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and the balance 20% is taxable. And 40% of the total accumulated corpus utilised for purchase of annuity is already tax exempt.
3) This change of rules on making the NPS withdrawal tax-free will apply to both government and private subscribers. Experts have welcomed this move, which will make NPS comparable with other long-term savings instruments like PPF and EPF. Currently, on withdrawal, 20% of the NPS corpus is taxable on maturity.
4) For central government employees covered under NPS, the government’s contribution towards the pension scheme has been increased from the existing 10% to 14%. The employee’s contribution remains unchanged at 10%.
5) This will benefit approximately 18 lakh central government employees covered under NPS. This measure will increase the government’s expenditure to around Rs 2,840 crore annually. Currently, those who had joined central government service on or after 1 January 2004 are covered under the NPS. This will increase the eventual accumulated corpus of all central government employees covered under NPS.
6) Central government employees covered under NPS will get more flexibility in terms of choice of pension fund managers. Also, they will be offered more choice in patterns of investment (debt and combination of equities and debt).
7) In addition, for central government employees, the government approved “payment of compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012.”
8) In terms of income-tax benefits, contribution by government employees under Tier-II of NPS will be covered under Section 80C for deduction up to Rs. 1.50 lakh, provided that there is a lock-in period of 3 years.
9) This benefit is also expected to be also extended to private subscribers. This will put NPS at par with ELSS or equity linked savings schemes in terms of lowest lock-in period of tax savings investments under Section 80C.
10) NPS provides two types of accounts – Tier I and Tier II. Tier I is a non-withdrawable account till retirement and is meant for savings for retirement while in Tier II accounts the subscriber is free to withdraw savings whenever he wishes. Tier II account is like a voluntary savings facility.