The Government of India has brought about a few important changes to NPS (National Pension Scheme). All the changes are beneficial for the NPS investors.
Some of the changes are only for the Central Government Employees while the others apply to all the NPS subscribers. Let’s go through the changes in detail.
Change # 1 (Taxation of NPS Maturity proceeds)
This change applies to all NPS subscribers (Central Government, State Government, Corporate NPS, and All Citizen Subscribers).
Old NPS Tax Rules for withdrawal from NPS Tier-I account
- 40% of the maturity proceeds must be used to purchase an annuity plan. You don’t have to pay any income tax on the amount 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.
- Up to 60% of the amount can be withdrawn lumpsum. However, only 40% is exempt from tax. For the remaining 20% (if you withdraw lump sum), you will have to pay tax at your slab rate.
For the older rules in detail, go through this post.
New NPS Tax Rules for withdrawal from NPS Tier-I account
- 40% of the maturity proceeds must be used to purchase an annuity plan. You don’t have to pay any income tax on the amount 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. (SAME AS ABOVE)
- Up to 60% of the amount can be withdrawn lumpsum.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.
If you are an existing investor in NPS or plan to invest in NPS, this is a great news. The tax treatment of maturity proceeds has just become even better. Do note there is an exclusive tax benefit of up to Rs 50,000 for investing in NPS Tier I account. This change can bring many investors to NPS fold.
Change #2 (Tax Benefit for investment in NPS Tier II)
As I see, this benefit has been extended to only Government NPS subscribers (Both state and Central). However, I expect this to get extended to other subscribers too.
Till now, investment in Tier II NPS account was not eligible for tax benefits.
Now, investments in Tier II NPS account will be eligible for tax benefit under Section 80C provided there is a lock-in of 3 years. By the way, NPS Tier II has no lock-in period attached. You can take out the money whenever you want. I would expect PFRDA, the pension regulator, to bring in some changes in NPS Tier II.
According to me, it is a hare-brained idea. Makes no sense to me. You already have sufficient investment choices under Section 80C. NPS Tier II is like a mutual fund (and not a pension product). Perhaps, the Government simply wants to popularize NPS Tier II.
Change #3 (Increase in Government Contribution)
This is applicable only to Central Government NPS subscribers. As I see, it is not even applicable to State Government Subscribers. Corporate NPS and All Citizens subscribers are not eligible either (Govt. does not contribute to their NPS accounts).
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 great news for all the Central Government NPS subscribers.
A higher contribution means higher corpus at the time of retirement (everything else being same).
By the way, Section 80CCD(2) provides an exemption to Government (or employer) contribution to the extent of 10% of salary (Basic +DA). Anything over and above should be taxable. I expect the limit to increase in the next Budget.
Change #4 ( Choice of pension fund managers and investment allocation)
Applicable only for Central Government Employees. I see no reason why this should not be extended to State Government Employees.
Now, central Government Subscriber will have a greater choice in selecting their pension fund manager.
More importantly, they may be allowed to select the investment pattern. Though the Government press release has not given any specification, I assume this means the Central Government Subscribers will have greater freedom in deciding asset allocation on their NPS assets. At the moment, the equity allocation for NPS subscribers is capped at 15%. A great move for Government subscribers.
Operationalizing the aforementioned changes will take some time.
What do you think of these changes? Do let me know in the comments section.
Additional Read
Government Press Release notifying the changes in NPS (December 10, 2018)
6 thoughts on “Good News: Lumpsum withdrawal from NPS is now exempt from tax”
Hello….
Recently there are changes in the NPS scheme related to tax and other benefits. Along this line I have read your couple of articles posted in last three to four days which are nicely explained. However, I would like to know your comments or may be another post on the following change (source: zeebiz) which was also suggested a few days back
“The government employees will be allowed to withdraw more lump sum at the time of retirement. The Cabinet has allowed government employees to commute 60 per cent of the fund accumulated at the time of retirement, up from 40 per cent at present. As per the Cabinet decision, if the employee decides not to commute any portion of the accumulated fund in NPS at the time of retirement and transfers 100 per cent to annuity scheme, then his pension would be more than 50 per cent of his last drawn pay, sources said”.
Hi Sanjay,
Thanks!!!
I had come across this pension guarantee info too through some media reports. It was source based. The Government could disclose anything due to state elections.
The Government press release makes no mention of pension guarantee. So, we can safely say there is no such proposal.
Hi Deepesh
Is there now clarity on Tax treatment for withdrawal for NPS tier – 2 account? Are they treated like debt fund and taxed as long term capital gains after 3 years , at 20% with indexation? Earlier it was thought that this would be treated as income and added to individual’s income and taxed as per the individual tax slab?
Thanks
Vasanth
Hi Vasanth,
I don’t yet have much clarity in this matter.
Hi Deepesh, Thanks for the information.
One quick question – do you think NPS is a good choice especially for saving additional tax by investing 50,000/- under section 80CCD? Does the math favour NPS?
Will be happy to read your views.
Thanks.
You are welcome, Anand.
Yes, maths will support it (subject to conditions I put in the post).
Btw, favour NPS over what?