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- Up to 60% of the amount can be withdrawn lumpsum.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- Up to 60% of the amount can be withdrawn lumpsum.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)