Home / Money / Calculators /  NPS bonanza for govt employees: More tax benefits, higher centre’s contribution

New Delhi: Finance Minister Arun Jaitley today announced big changes to the National Pension System or NPS, making it more attractive for central government employees. NPS, a pension scheme, was launched in January 2004 for government employees. However, in 2009, it was opened to all sections. Apart from higher government contribution to NPS, Jaitley also announced additional tax benefits for the pension scheme for all categories of employees. The finance minister said that the Cabinet had cleared the changes on December 6 but did not announce it due to state elections. The 7th pay commission had recommended the constitution of a committee of secretaries to examine NPS rules for government employees, Jaitley said. The government had held an inter-ministerial consultation after the panel of secretaries gave their recommendations for the changes, he added.

Here are the changes to NPS announced by Jaitley for government employees:

1) The government will contribute a higher 14% of the basic salary of its employees as its contribution, instead of 10% earlier. Employees contribution will remain at 10%. The government will bear an additional expenditure to the tune of around 2,840 crore for the financial year 2019-20, and it will be in the nature of a recurring expenditure.

2) The move is expected to benefit 18 lakh central government employees. NPS allows subscribers to contribute regularly in a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

3) The government has made withdrawal from NPS on retirement tax-free. According to the current rules, 40% of the total accumulated corpus utilised for purchase of annuity is already tax exempted. And out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable. Now, according to the new rules, the whole 60% kitty on withdrawal will be tax free.

4) Jaitley also announced additional tax benefit on investment in NPS. Contribution by the government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax provided that there is a lock-in period of three years. Investment in Tier II account of NPS will have the same tax benefits as that of other schemes such as general provident fund, contributory provident fund, employees provident fund and public provident fund.

Investment in Tier II account of NPS will qualify for Section 80C deduction. NPS offers two types of accounts to its subscribers. The Tier 1 account is non-withdrawable till the subscriber reaches the age of 60. The Tier 2 account is a voluntary savings account and subscribers can withdraw their money from it whenever they want.

5) Government employees will also get more choices for selection of pension funds and pattern of investment in NPS with equity and debt components. The Cabinet also approved payment of compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012.

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