The government has made the whole 60% of the NPS accumulated corpus tax free, bringing it at par with PPF and EPF, besides raising its contribution to 14% of basic pay and DA for government employees
In order to bring in parity in tax treatment for all retirement products, the government has made maturity withdrawals from National Pension Systems (NPS) tax free. It has also allowed over 19 lakh central government employees subscribing to NPS since 2004 to select private pension fund managers, increased its contribution for government employees from 10% to 14% of basic pay and DA and has given them freedom to invest up to 50% of their corpus in equities as against 15% now.
A pure defined contribution pension product, NPS was introduced in 2004 for government employees and, in 2009, it was extended to all private sector employees.
Tax-exempt at all stages
At present, in NPS 40% of the total accumulated corpus has to be compulsorily used to buy annuity at retirement and is tax-exempt. Out of 60% of the accumulated corpus withdrawn at the time of retirement, 40% is tax-exempt and balance 20% is taxable. Now, the whole 60% of the accumulated corpus will be tax-free, bringing it on par with PPF and EPF, which are tax-exempt at all the three stages—investment, accumulation and withdrawal.
Subscribers of NPS will also continue to get additional tax break of Rs 50,000 under Section 80CCD of the Income Tax Act, which was introduced in 2015 on investments, apart from Rs 1.5 lakh tax exemption under Section 80C. Investments in EPF and PPF also get tax deduction of Rs 1.5 lakh under Section 80C. The new rules will be applicable from the next financial year.
Moreover, contribution by government employees under Tier -II account of NPS will now be covered under Section 80C provided there is a lock-in period of three years. To open a Tier-II account, where one can withdraw money any time, it is mandatory to have a Tier – I account.
More equity inflows
As central government employees account for one-third of the contributions in NPS, stock markets will get steady flow of equity funds. Even state governments may offer the same benefits to their employees, which will increase the quantum of equity inflows many times.
At present, private sector subscribers of NPS can invest up to 75% in equity under the active choice option. It is an option where the subscriber decides his asset mix. It was fixed at 50% since NPS was opened to private sector subscribers in 2009. Higher equity exposure will benefit young investors with a long working life as equity tends to give higher returns over a longer period of investment.
One can even opt for the life cycle fund where the equity exposure come down as one grows older.
The pension fund regulator had introduced two more life cycle funds for non-government subscribers apart from the existing moderate life cycle fund (with 50% equity cap) for private sector investors in auto choice. The two were: aggressive life cycle fund (LC 75) with 75% equity cap and the other, conservative life cycle fund )LC 25) with cap on equity at 25%.
Cost effective, easy to operate
The NPS account has four types of costs: central record-keeping charges, point of presence (PoP) charges, custodian charges, and pension fund management charges. Pension fund management, or fund management charge, is an annual fee paid to the fund managers for managing the subscriber’s money.
To invest in PFRDA-regulated NPS, one has to open an account with any one of the points of presence (POPs) and get a Permanent Retirement Account Number (PRAN). One can choose the investment according to one’s preference and opt for a pension fund manager. The individual can operate the account from anywhere in the country, even if one changes job or moves to another city.
The subscriber can contribute the amount through cash, local cheque, demand draft or the electronic clearing system at his chosen POP-SP. An individual will have to comply with the Know Your Customer (KYC) norms and, after the account is opened, the central record keeping agency will dispatch the subscriber’s unique PRAN Card, which will be the primary means of identifying and operating the account.
Subscribers can choose between NSDL e-governance and Karvy Computershare. A CRA is responsible for record-keeping, administration and customer service functions for all subscribers.