In her maiden budget speech, the finance minister, Nirmala Sitharaman, while presenting Union Budget 2019, has announced for a number of changes to the National Pension System (NPS) scheme.
National Pension System is a government-backed pension scheme which voluntarily pools resources and invests in various securities including equity, corporate bonds and government bonds.
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Here is a list of changes made to the NPS scheme in the Budget 2019 and its impact on the NPS subscribers:
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NPS to be Tax Exempt at All Stages
The tax exemption limit on NPS corpus withdrawal in a lump sum at the time of retirement has been increased from 40% to 60%. As you may be knowing, 60% of the NPS corpus can be withdrawn at the time of retirement or at the age of 60, whichever is later. The rest 40% of the corpus has to be invested in an annuity.
Earlier, out of the 60% withdrawable, while 40% was tax exempt, the subscriber had to pay income tax on the rest 20% as per the applicable Income tax slabs. However, with the budget announcement, the entire 60% of the corpus would be tax exempt.
NPS subscribers can claim tax deductions on NPS contributions (upto Rs. 1.5 lakh u/s 80C of the Income Tax Act, 1961). Further, returns earned on the NPS contributions are also tax exempt. With tax benefits extended on lumpsum withdrawal, NPS now qualifies to be an Exempt-Exempt-Exempt (EEE) category product.
The EEE status to NPS in terms of tax treatment also makes it on par with other small saving schemes such as Public Provident Fund (PPF) and Employee Provident Fund (EPF).
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Government Contributions to Increase
The government has also announced to increase its NPS contribution limit from existing 10% to 14% of the basic salary in the case of central government employees. So far the central government used to make 10% contribution to the NPS account of the employees which has been increased to 14% of the basic salary from the financial year 2020-21.
However, the mandatory contributions by the employees will remain the same at 10% of the basic salary.
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Tax Deductions on Tier II Contributions
The government has also extended tax deduction benefits u/s 80C of the Income Tax Act, 1961 for the contributions made to Tier II account of the NPS scheme. Tier II account is a voluntary account that can be opened only if you already have a Tier I NPS account.
The contributions made to the tier II account are not mandatorily locked in and can be freely withdrawn at any time. However, in case you want to claim tax benefits on your contributions towards tier II NPS under section 80C, you can claim it only with a lock-in period of 3 years, making the scheme at par with ELSS.
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Separation of NPS Trust and PFRDA
The government has also decided to separate NPS trust from the Pension Fund Regulatory and Development Authority of India (PFRDA). The decision is said to be taken keeping in view the wider interest of the NPS subscriber and to maintain arm’s length relationship of the NPS trust with PFRDA.
