The government on Monday announced a slew of changes to the National Pension Scheme (NPS), including increasing the government’s contribution, exempting withdrawals from tax, and also exempting up to ₹1.5 lakh of contributions to the scheme from tax.
The NPS was introduced for central government employees who joined service on or after January 1, 2004.
Prior to the change, NPS subscribers could withdraw 60% of the corpus, with 40% of mandatory being deposited in annuity schemes. Of the 60%, one-third was taxable and two-third was tax exempt. Following the changes, the entire 60% would be tax free. Taken in combination with the fact that the 40% to be deposited in annuities was already tax exempt, the change means that the entire withdrawal from NPS will now be tax free.
The government also increased its share of contribution to the NPS. So far, subscribers and the government each contributed 10%. Following the change, the government contribution will go up to 14%. The government said that the changes would benefit about 18 lakh central government employees, and would cost an additional ₹2,840 crore in financial year 2019-20.
“Contribution by the Government employees under Tier-II of NPS will now be covered under Section 80C for deduction up to ₹1.5 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of 3 years,” the government said in a release.
The Seventh Pay Commission in its recommendations made in 2015 had called for the creation of a committee of Secretaries to look into reforming the NPS. This committee, formed in 2016, submitted its report in 2018. The Cabinet cleared its proposals last Thursday, but the government made the announcement only on Monday so as not to interfere with polling day for state-level elections.
