Govt contribution to NPS hiked, withdrawal to be tax-free

In a move that will bring cheer to National Pension Scheme (NPS) subscribers, Finance Minister Arun Jaitley on Monday announced that the government is increasing its contribution under NPS for central government employees to 14 per cent from the current 10 per cent and making the withdrawal by subscribers at the time of retirement completely tax-fee. The tax measures will come into effect from April 1.

The decision, which was taken during the Union Cabinet meeting last week, is likely to benefit 18 lakh central government employees who joined service on or after January 1, 2004. Other than government employees, private citizens aged between 18 and 60 years of age can also invest in the government-run pension scheme.

The impact on the exchequer on account of increase in government's contribution is estimated to be around Rs 2,840 crore for the 2019-20 fiscal, Jaitley said. Addressing a press conference, Jaitley said the changes have been made in the larger interest of employees.

The government has decided to now offer 4 per cent higher contribution over and above the current 10 per cent. The minimum employee contribution to the NPS is 10 per cent of the basic pay and an equal contribution is made by the government. The employee contribution, however, has been capped at 10 per cent of the basic salary for the purpose of seeking income tax benefit.

According to Sandeep Shrikhande, CEO, Kotak Mahindra Pension Fund, this move is to bring those government employees who joined after 2004 and were offered NPS on par with those who joined before 2004 and were on defined benefit. "The amount of pension that accumulated at the time of retirement for the post-2004 employees was not matching up to those who are on defined benefits,"' he said.

The finance minister also announced that the entire corpus withdrawn at the time of retirement by NPS subscribers will now be tax-free. This will apply to both government and private subscribers. As per NPS rules, a subscriber can withdraw 60 per cent of the corpus at the time of retirement, but has to buy annuities with the remaining 40 per cent corpus. Of the 60 per cent that can be withdrawn, as of now, the subscriber is eligible for exemption on 40 per cent, while 20 per cent is taxed. From April 1, the entire 60 per cent will be tax-free.

According to Sumit Shukla, CEO, HDFC Pension Fund, this is a positive move as it will bring NPS on par with Employee Provident Fund (EPF) and Public Provident Fund (PPF), both of which are exempt from tax at contribution, accumulation and withdrawal stages.

However, according to Shrikhande, this move would encourage subscribers to withdraw the 60 per cent corpus instead of buying annuity. "While it is good that the withdrawal is tax-free, the objective of NPS is to provide pension and not lump sum,"' he pointed out.

The government said that contributions by government employees under the Tier-2 of NPS will now be covered under Section 80C for deduction up to Rs 1.5 lakh for the purpose of income tax, provided that there is a lock-in period of three years.

"This too is a positive move as it will bring NPS on par with ELSS, as 75 per cent of the amount can be invested in equities and the charges on NPS are much lower than ELSS," Shukla said.

Pension Is Tension No More

• The entire corpus withdrawn at retirement by NPS subscribers, including government and private subscribers, will be tax-free
• Impact on exchequer on account of increase in government’s contribution to NPS is estimated to be around Rs 2,840 crore for the 2019-20 fiscal.