The latest move on tax-free withdrawals would meet a long-pending demand to make NPS at par with employees’ provident fund (EPF) in terms of tax treatment.
The Centre on Monday announced a major pre-poll bonanza for 1.19 crore subscribers of the National Pension System (NPS). It has made 60% of the NPS corpus withdrawal tax-free at the time of withdrawal against 40% now, raised its contribution to 14% from 10% (of basic pay plus dearness allowance) for its staff and has given a choice to them to invest up to 50% of the corpus in equities, at par with private NPS subscribers.
The latest move on tax-free withdrawals would meet a long-pending demand to make NPS at par with employees’ provident fund (EPF) in terms of tax treatment. NPS will now be under the exempt-exempt-exempt (EEE) regime meaning no tax on annual contributions, annual returns and withdrawals at maturity. The government employees can also opt for private fund managers instead of public sector managers now.
While the Centre’s move to enhance its NPS contribution would cost it Rs 2,816 crore extra annually, the cost could be much more for the states which might follow the Centre’s norms. “The state governments will favourably consider this (higher contribution),” Jaitley said. Since the defined contributory pension system was rolled out from January 1, 2004, to contain pension bill, about 18 lakh central government employees are enrolled in the scheme with an assets under management (AUM) of Rs 95,052 crore as on October 31, 2018. About 40.6 lakh employees of the state governments are enrolled in the scheme with an AUM of Rs 1.33 lakh crore.
The Centre’s decision to streamline NPS comes on the back of agitation by some central government employee associations for the restoration of the old pension scheme or pay-as-you-go pension scheme (pension was 50% of the last basic pay). Jaitley said pension under NPS could be higher at 52-53% of the last pay if the entire corpus is invested in an annuity scheme. The decision to allow the government employees, especially the younger ones, to increase their equity exposure up to 50% of the corpus would channelise more long-term funds to the stock market. The current equity exposure limit is 15%.
To implement the taxation changes in NPS, the government would bring changes to the Income Tax Act via the Finance Bill in the upcoming Budget session of Parliament in January-February, 2019.