Government Gives New Look to National Pension System(NPS)

NPS tax treatment at maturity has just got much better. Now, the entire permissible lump sum withdrawal (60%) from NPS is exempt from tax.

The government has granted NPS exempt, exempt or 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

Along with this, the Government announced a few more changes to NPS. NPS Tier II investments will also be eligible for tax benefit under Section 80C.

There is a lot of good news for Government NPS subscribers. Government contribution has gone up. There is a greater flexibility in how they can manage their NPS investments.

Find below four changes which Government has brought in this product:

 

Sno  New National Pension Scheme (NPS) Rules
1

Taxation of NPS Maturity proceeds:

  1. 40% of the maturity proceeds must be used to purchase an annuity plan. However, the annuity income is taxed at your slab rate. Remember, 40% is the minimum. You can even use 100% corpus to purchase an annuity plan,
  2. Up to 60% of the amount can be withdrawn lumpsum. The entire 60% is exempt from tax. Effectively, no tax on lumpsum withdrawal from NPS at the time of retirement. This change makes NPS on a par with other investments like PPF & EPF. 
  3. This changes in tax rules on NPS withdrawal  will apply to all subscribers, including Government Employees.
2 Tax Benefit for investment in NPS Tier II:

  1. In another tax benefit for NPS subscribers, contribution under Tier-II of NPS will now be covered under Section 80C for deduction up to Rs. 1.50 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.
  2. 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. I would expect PFRDA, the pension regulator, to bring in some changes in NPS Tier II.
3 Increase in Government Contribution(Applicable to Central Govt Employees):

  1. For Government Subscribers, the Government also contributes to your NPS account. So, you pay 10% and the Government pays 10% to your NPS account. Now, the Central Government will contribute 14% of your salary to your NPS account. This is a fantastic news.
  2. However, It’s not applicable to State Government Subscribers. Corporate NPS and All Citizens subscribers are not eligible either (Govt. does not contribute to their NPS accounts).
4 Choice of pension fund managers and investment allocation(Applicable to Central Govt Employees):

  1. The Central Government Subscriber will have a greater choice in selecting their pension fund manager. This gives greater freedom to Central Government Employees in deciding asset allocation on their NPS assets.
  2. At the moment, the equity allocation for NPS subscribers is capped at 15%.
  3. A great move for Government subscribers.

Conclusion:

By making above changes in the NPS rules, the Government has made strong case for us to relook at NPS from retirement perspective. A Great move for Government Subscribers.
However kindly note, it is a very long-term investment product, so make sure you understand the implications and the working of NPS before opening an account. Estimate the amount of monthly savings required to meet your post-retirement expenses, keeping the inflation and your life expectancy in mind. Diversify across various investments, including mutual funds and NPS, but do not bank entirely on the latter.

Annuities can provide a baseline support to meet household during retired years, but choosing NPS to accumulate a retirement corpus remains a choice which one needs to take now. A corpus created through a mix of mutual funds can still buy you an Immediate Annuity scheme when you are 60, with all your savings at your disposal. 

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