Union Budget 2019: From the beginning of the financial year 2020-21, the entire lump sum NPS withdrawal made at the time of retirement at the age of 60 years will become tax free.
Union Budget 2019: Finance Minister Nirmala Sitharaman in her Budget 2019 speech said that the National Pension System (NPS) amendments to provide higher contribution by Central Government to its employees, benefits of 80C deductions on deposits made by the employees in Tier-II accounts and making entire lump sum withdrawal from NPS account on maturity at the time of retirement at 60 years of age tax free will take effect from 1st April, 2020 and will, accordingly, apply in relation to assessment year 2020-21 and subsequent assessment years.
Although the changes in NPS rules were mentioned in Budget 2019, the decisions were taken earlier and the Gadget Notification was already issued.
So far, the Central Government used to make matching contribution of 10 per cent to the NPS accounts of its employees, but from the beginning of next financial year, the government will make contribution of 14 per cent. However, the mandatory contribution by the employees will remain as 10 per cent of the basic salary.
Another exclusive benefit for the Central Government employees will come into effect from April 1, 2020 is that the contributions made to voluntary Tier-II NPS account will become eligible for deductions u/s 80C of the Income Tax Act provided that the amount deposited is not withdrawn before completion of three years from the date of deposit.
However, for other NPS subscribers (other than Central Government employees), there will not be any 80C benefits on contribution made to Tier-II account.
The most significant change for all NPS subscribers that come into effect from the beginning of the financial year 2020-21 is that the entire lump sum withdrawal made at the time of retirement at the age of 60 years will become tax free.
As per the NPS rules, 60 per cent of the NPS corpus may be withdrawn by a subscriber when he/she retires at the age of 60 years, while the rest 40 per cent of the corpus has to be invested in a pension policy of an insurance company regulated by the IRDAI.
At the beginning, to encourage subscribers to invest more in pension policy, the entire lump sum withdrawal was made taxable. Subsequently, out of the 60 per cent lump sum withdrawal, 40 per cent was made tax free and 20 per cent was taxable. But from April 1, 2020, the entire 60 per cent lump sum withdrawal will be tax free.
Although, this tax benefit on lump sum withdrawal will be for all the NPS subscribers, unlike the tax benefit on Tier-II contributions, which has been made available to Central Government employees only.
Moreover, apart from Central Government, state governments,many semi government organisations, PSUs and even some private sector companies also take benefits of NPS, but higher contributions from employers will be available to the Central Government employees only.
“From a NPS point of view, the budget has proved to be a bit of a dampener. The 14 per cent limit is applicable only to the Central Government’s contributions to its employee’s account. Similarly, 80C exemption on Tier II contributions is available only to Central Government employees. The good thing is that the withdrawal is now completely tax-free,” said Sandip Shrikhande, CEO, Kotak Mahindra Pension Fund Limited.