The Centre has decided to increase its contribution to the NPS (National Pension System) to 14 per cent from 10 per cent for the central government employees who joined service on or after January 1, 2004.
The minimum employee contribution stands at 10 per cent. The government has also enhanced the tax benefit by allowing entire 60 per cent of corpus withdrawn at the time of retirement to be tax exempt — as against 40 per cent withdrawal component being tax free earlier.
Announcing these changes Monday, Finance Minister Arun Jaitley said these measures are likely to benefit 18 lakh central government employees as of now, and will cost the government Rs 2840 crore during 2019-20. Jaitley said higher government contribution will result in greater pension payouts after retirement without any additional burden on the employee.
The government will also pay compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012. Employees can select the type of pension fund depending upon their risk appetite from the schemes offered by 8 pension fund managers. Employees can choose to invest 100 per cent in government securities or in fund offering a combination of equity and debt instruments. While the enhanced contribution pertains to only central government employees, states typically follow the central government salary structure and may enhance their pension contributions for state government employees.
The contribution by the government employees under NPS will now be covered under Section 80C for deduction up to Rs 1.50 lakh for the purpose of income tax, at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund, provided that there is a lock-in period of 3 years. Tax exemption limit on the withdrawal component has been increased for both government as well as private sector employees.
“Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60 per cent. With this, the entire withdrawal will now be exempt from income tax. At present, 40 per cent of the total accumulated corpus utilized for purchase of annuity is already tax exempted. Out of 60 per cent of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40 per cent is tax exempt and balance 20 per cent is taxable,” the government said in a statement.
The new norms are expected to kick in from April 1, 2019. The changes were approved by the Union Cabinet in its meeting on December 6, but were not announced due to pending elections in Rajasthan and Telangana. The government had in 2016 constituted a Committee of Secretaries to suggest measures for streamlining the implementation of NPS. The Committee submitted its report in the year 2018, based on which the government announced changes to the NPS.