Union Finance Minister Nirmala Sitharaman in Budget 2019 proposed many changes to the income tax rules governing investment and withdrawal in retirement pension scheme NPS, though some of them were approved by the Union Cabinet last year. The finance minister increased the income tax exemption limit on withdrawal from NPS while also announced some additional tax benefits for central government employees who contribute towards the retirement scheme. Tax experts have welcomed the higher exemption limit on NPS but said that some the proposed tax benefits for central government employees should be also extended to other sections of the society.
These amendments will take effect from assessment year 2020-21. Some of the changes proposed to NPS are based on 7th Pay Commission.
“The government had made certain announcements in December 2018 in relation to NPS, wherein it raised its contribution to Tier I account for its employees from 10% to 14% and also announced that the tax benefit to such employees in respect of their own contribution to Tier II account will be available u/s 80C with a lock-in period of 3 years. The Finance Minister has proposed the changes in the Budget to implement the announcements. Further, the exemption of lump sum payment from NPS upon retirement is proposed to be raised from 40% to 60%, as also announced earlier," said Kuldip Kumar, Partner & Leader, Personal Tax, PwC India.
NPS rule changes proposed in Budget:
1) Currently, upon retirement, an individual can withdraw a lump-sum of up to 60% of the NPS corpus fund and balance 40% has to be invested in an annuity plan. But only 40% of the corpus fund withdrawn is tax-exempt and 20% is taxable in the hands of the taxpayer.
The finance minister has now proposed to raise the income tax exemption limit from 40% to 60% of the NPS corpus, effectively making the entire withdrawal exempt from income tax. This benefit will also be available to all NPS subscribers.
2) The Union Cabinet had last year approved increasing the contribution to Tier I account for central government employees from 10% to 14%, a move that benefits approximately 18 lakh central government employees covered under NPS. The new entrants to the central government service on or after 1st January are covered under the National Pension System (NPS). The mandatory contribution of central government employees will remain as 10% of basic salary.
In this connection, the Budget proposed amending Section 80CCD(2) of the Income Tax Act to allow exemption of employer contribution up to 14% of the salary of central government employees.
Section 80 CCD (2) applies to when an employer is contributing towards the NPS of an employee. This benefit is in addition to the deduction of ₹1.5 lakh under Section 80C and also an additional deduction benefit of ₹50,000 under Section 80 CCD towards investment in NPS.
Tax experts say that this benefit should have been extended to private sector employees too. “Frankly, Section 80C is already crowded and limit has not been enhanced. So it would have been better to allow private sector employees the enhanced 14% employer contribution (instead of 10%). That would have helped save more tax," says Archit Gupta, founder and CEO of ClearTax.com.
3) In another benefit for central government employees, the Budget proposed that contributions made to Tier-II NPS account will become eligible for deductions under Section 80C, if the amount is locked-in for a minimum of three years.
NPS has two accounts—Tier 1 account or the retirement account which is mandatory. The Tier 2 account is an optional account and comes with withdrawal flexibility.