NEW DELHI: Last week, the Central government increased its contribution towards the National Pension Scheme (NPS) for government employees from 10 per cent to 14 per cent, and made withdrawal completely tax-free for both government and private subscribers.
Currently, 20 per cent of the NPS corpus is taxable on maturity. While the new rules will be effective from next financial year, investors are already thinking if it could be on a par with the Public Provident Fund (PPF) and other schemes.
“The recent change announced by the government will certainly go a long way in making NPS more attractive and on a par with the other pension schemes. It will help in creating a social security net. With tax-free returns, we expect many subscribers joining the scheme in the coming days,” said Hemant Contractor, chairman of the Pension Fund Regulatory and Development Authority (PFRDA).
While wealth managers and investors both have welcomed the scheme, one of the confusion investors have is whether investing in PPF is better or should one go for NPS.
Experts claim that as both the instruments are attractive, what will suit an investor most will depend on the financial goal of the investor.
“If you are looking for a safe monthly income, then NPS is a better option. But if you are looking for a big lump sum in 15-20 years, PPF is any time a good option, given the current interest rate,” said Rohit Singh, an executive with HDFC Pension Fund.
By increasing the government’s contribution, the NPS contribution will rise 7 per cent every year, the corpus will earn 7 per cent compounded returns and the annuity rate will also be 7 per cent, Singh said.
Another feature making NPS more attractive is that Central government employees will also be allowed to choose their pension funds and decide the pattern of investment, which was not the case earlier.
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 three years. This benefit is also expected to be extended to private subscribers.
Once approved, this will put NPS on a par with Equity-Linked Savings Scheme in terms of the lowest lock-in period of tax savings investments under Section 80C.
