MUMBAI: The recent Union Budget introduced a few changes in the National Pension System (NPS) as efforts are on to bring in more subscribers and also make it more lucrative for the government employees who are part of the scheme. First, the income tax exemption limit has been increased from 40 per cent to 60 per cent of payment on final withdrawal from NPS, effectively making NPS withdrawal tax-free, giving the pensioners more disposable funds.
“Now, NPS withdrawals of 60 per cent are completely tax-free, falling in line with EPF (Employee Provident Fund) and PPF (Public Provident Fund) tax treatment of EEE (exempt-exempt-exempt). Initially, 40 per cent of the total withdrawal was tax-free and the remaining 20 per cent was taxable,” said Amit Singh, CEO, Investica. While the decision to give the EEE status was taken earlier, the Budget announcement has made it clear that it will be applicable from April 1, 2020. EEE is tax exemption on the contribution, accumulated corpus and at the time of withdrawal.
At present, on reaching the age of 60, 40 per cent of the corpus has to be invested in annuity plan and the rest of the amount can be withdrawn. The 40 per cent invested in annuity is tax-free, but the income earned out of annuities later becomes taxable. Out of the 60 per cent part, 40 per cent enjoyed tax exemption on withdrawal earlier.
Second, in the case of Central government employees, deduction on employer contribution has been hiked up to 14 per cent of salary from the current 10 per cent. NPS is a government-sponsored savings scheme, where a government employee makes periodic contributions towards creating a pension pool from his/her monthly salary and matching contribution is made by the employer. Amendments have been made in Section 80CCD to allow deduction on increased employee contribution to the Tier II NPS account of Central government employees, with a lock-in period of three years.
Another policy level changed in the NPS is to separate NPS Trust from the PFRDA (Pension Fund Regulatory and Development Authority) to “maintain arm’s length relationship of the NPS Trust with PFRDA”. PFRDA regulates and implements NPS and Atal Pension Yojana.
“The importance and focus on the National Pension Scheme by GoI is evident with the separation of NPS trust from the PFRDA structure,” ICRA noted in its comments on Budget. The State Bank of India welcomed the move, “since bank employees are also a part of NPS, this is a good measure to boost confidence in the scheme at large”.