NPS withdrawal made tax-free on par with PPF, EPF
11 December 2018
The union cabinet on Monday approved changes to the National Pension Scheme (NPS) making it fully tax-exempt and bringing it on a par with other pension schemes like PPF and EPF.
The government granted NPS exempt, exempt and exempt or EEE status, which means that like PPF (public provident fund) or EPF (employee provident fund) investment at the investment stage, accumulation and withdrawal stage will be tax free.
Earlier, NPS only enjoyed exempt, exempt and taxable or EET status, meaning that on withdrawal NPS was partially taxable. These changes were approved by the cabinet in its 6 December meeting but the announcement was delayed due to state elections.
With the grant of the EEE status, NPS on withdrawal will be totally tax-exempt. Currently, 40 per cent of the total accumulated corpus utilised for purchase of annuity at retirement or reaching the age of 60 is already tax exempted. Of the remaining 60 per cent of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40 per cent is tax-exempt and balance 20 per cent is taxable. Now, the whole 60 per cent of the accumulated corpus will be tax free, bringing it on a par with other investment schemes like PPF and EPF.
The changes in tax rules on NPS withdrawal will apply to all subscribers, including government employees.
In another tax benefit for NPS subscribers, contribution under Tier-II of NPS will now be covered under Section 80C for deduction up to Rs1.50 lakh for the purpose of income tax benefits, provided there is a lock-in period of three years. This brings it on a par with other schemes such as EPF and PPF.
NPS offers two types of accounts to its subscribers. The Tier I account is non-withdrawable till the subscriber reaches the age of 60. Partial withdrawal before that is allowed in specific cases. The Tier II account is a voluntary savings account and subscribers can withdraw their money from it whenever they want.
In another rule change, the government has decided to increase its contribution to the NPS for central government employees to 14 per cent of their basic pay as compared to 10 per cent earlier. This move will benefit 1.8 million central government employees. The government will bear an additional annual recurring expenditure of Rs2,840 crore due to its higher contribution. The central government employee’s contribution will remain changed at 10 per cent of the basic pay. This will increase the accumulated corpus of all central government employees covered under NPS eventually give them greater pension payouts after retirement without any additional burden. Currently, new entrants to central government service on or after 1 January 2004 are covered by NPS.
The government also said that the central government will get more investment options (both debt and equity) and choice of pension fund managers.