The government is likely to do away with tax at maturity in the upcoming budget to make the pension scheme more lucrative and savings friendly
Finance Minister Arun Jaitley is likely to do away with tax on National Pension Scheme (NPS) at maturity in the Union Budget, to be announcement on February 29.
NPS floated by the central government permits investments in three separate asset classes -- equities, government securities and a range of fixed income instruments. Subscribers can decide how their NPS pension fund is allocated across the three asset classes.
"Tax exemptions on the withdrawals of NPS is among the most important points raised by the regulator, Pension Fund Regulatory and Development Authority (PFRDA), in its pre-Budget inputs to the ministry," a senior revenue department official told dna.
"The government is strongly considering the opinion as to make the pension scheme more lucrative and savings friendly," said a government source aware of the development.
At present, NPS contribution are exempt from tax up to Rs 50,000, from the assessment year 2015-16. This is the other limit prescribed in 80 CCE of Income Tax Act 1961. The contributions made to the scheme are tax-exempt, but withdrawals are counted as taxable income.
"It will be a significant move and will enhance the attractiveness of the scheme," said a fund manager who do not wish to be named. There are reservations on liquidity and taxes on withdrawal. The FM's move will resolve these issues and one could expect a higher participation by investors," he said.
According to the data, NPS has asset under management (AUM) of Rs 1.08 lakh crore and 94.68 lakh subscribers as on December 31, 2015. So far state government employees have deposited Rs 51,913 crore under the NPS, while central government employees contributed Rs 44,752 crore. Corporate sector accounted for Rs 8,089 crore under the scheme.
The employee contribution is fixed at 10% per month which is matched by an employer contribution of the same amount.
According to the rules, the central, state government and public sector employees mandatorily contributing to NPS are restricted from availing any other form of pension scheme initiated by the government.
Subscribers who leave the scheme before retirement (or age 60, whichever is the earlier) are required to invest 80% of their accumulated savings in a life annuity of any insurance company approved by Insurance Regulatory Development Authority of India. The remaining 20% is eligible for withdrawal as lumpsum.
The minimum contribution is Rs 6,000 per year, while there is no upper limit.
Under NPS, one can open pension account electronically. There is a provision of partial withdrawal up to 25% of subscriber's own contribution for special purposes such as purchasing home, health issues, higher education, wedding etc.
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