New Delhi: The government has decided to make the National Pension System (NPS) entirely tax-free and let central government employees choose savings schemes offering equity exposure up to half of their corpus. Central government subscribers of NPS can currently invest only 15% of their corpus in equity, compared to 75% for others.

The move makes NPS at least as good as provident fund (PF) schemes from the taxation point of view. Contribution to the NPS corpus is included in the basket of investments wherein income tax deduction of 1.5 lakh per year is allowed for social security schemes. It is also eligible for an additional deduction of up to 50,000.

The Union cabinet has exempted the part of the NPS corpus that is withdrawn on retirement from income tax, finance minister Arun Jaitley said on Monday. The cabinet decision taken last week was made public only on Monday in view of the assembly elections in Rajasthan and Telangana.

Earlier, 60% of the corpus could be withdrawn while exiting the scheme and 20% of the withdrawn amount was taxable. The cabinet has made this portion tax-free. The remainder, which can be used to buy annuities, is already tax-free. The cabinet’s move has put NPS on par with PF savings, which are not taxed at any of the three stages of saving, profit accrual or exit.

Taxability of a part of the NPS withdrawal was a big deterrent so far in ramping up enrolment and this has now been removed, Pension Fund Regulatory and Development Authority (PFRDA) chairman Hemant Contractor said after the government’s announcement.

The cabinet has also raised the contribution of the central government to the NPS corpus of its employees from 10% to 14%, Jaitley said. This will increase the eventual accumulated corpus of all central government employees covered under NPS. There are currently 1.8 million Union government employees. The revenue impact from the increased contribution to employee corpus is expected to be around 2,840 crore for FY20. The changes will be effective from next fiscal.

The employees will now have more options to chose their investment managers and savings plans, department of economic affairs secretary Subhash Chandra Garg said. At present, central government members of NPS have a standard debt-oriented investment. The new choices are a conservative life-cycle fund allowing 25% equity investments, another plan that allows 50% equity investments that a younger workforce may be interested in and a plan that invests the entire corpus in government securities, explained Garg.

Experts said the changes will make NPS more attractive. “These are steps in the right direction to improve the payout to central government employees post retirement without additional burden on them," said Divya Baweja, partner, Deloitte India. The additional tax savings is available to all NPS members including government staff, said Baweja.

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