Streamlining the National Pension System

On December 10, Finance Minister Arun Jaitley stated that the Centre has decided to increase its contribution to the NPS for central government employees to 14% and also made the entire withdrawal amount tax free at the time of retirement.

As per a Press Release issued on December 10, the Union Cabinet in its Meeting on December 6, 2018 approved the following proposal for streamlining the National Pension System (NPS):

• Enhancement of the mandatory contribution by the Central Government for its employees covered under NPS Tier-I from the existing 10% to 14%.

• Providing freedom of choice for selection of Pension Funds and pattern of investment to central government employees.

• Payment of compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012.

• Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60%. With this, the entire withdrawal will now be exempt from income tax. (At present, 40% of the total accumulated corpus utilized for purchase of annuity is already tax exempted. Out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable.)

• Contribution by Government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund, and Public Provident Fund provided that there is a lock-in period of 3 years.

The Release stated that approximately 18 lakh central government employees covered under NPS would be benefitted from the streamlining of the National Pension System.

The Release added that the proposed changes to NPS would be made applicable immediately once time critical decisions are taken in consultation with the other concerned Ministries / Departments.

In this regard, Economic Affairs Secretary Subhash Chandra Garg said that the choice for employees would also expand in terms of fund managers and they can choose from the list of eight rather than three fund managers at present.

Garg further added that government employees will now have more investment options:

• invest up to 25% of the corpus in equity,

• invest up to 50% of fund in equity, and

• invest 100% in government securities.

The major impacts are as follows: Increase in the eventual accumulated corpus of all central government employees covered under NPS; Greater pension payouts after retirement without any additional burden on the employee; Freedom of choice for selection of Pension Funds and investment pattern to central government employees; Benefit to approximately 18 lakh central government employees covered under NPS; and Augmenting old-age security in a time of rising life expectancy. Also, by making NPS more attractive, government will be facilitated in attracting and retaining the best talent.