A coin is dropped into a piggy bank in this arranged photograph (Photographer: Ron Antonelli/Bloomberg)

Withdrawals Under National Pension Scheme To Be Tax-Free

Withdrawals made by subscribers of the National Pension Scheme at the time of retirement will be made tax free.

Employees can only withdraw 60 percent of funds invested in the scheme at the time of retirement, out of which 40 percent was exempted from tax. Now, the entire 60 percent withdrawal made by the scheme’s subscribers will be exempt from tax, according to a statement by Ministry of Finance. The dates for the changes to come into effect will be notified later.

The remaining 40 percent of the accumulated corpus is utilised for purchase of annuity and is already exempt from tax. The central government will also contribute 14 percent of an employees’ basic salary as its contribution to the scheme from 10 percent earlier. The employees’ contribution, however, will be capped at 10 percent of the basic salary.

The move is expected to benefit about 18 lakh central government employees—who have joined service on or after Jan. 1, 2004 and are covered under the NPS—and private-sector employees who invest in the scheme. Indian citizens aged between 18 and 60 years were permitted to invest in it in 2009.

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"The impact on the exchequer… is estimated to be around Rs 2,840 crores for the financial year 2019-20 and will be… a recurring expenditure," the statement said. The move will increase the accumulated corpus of all central government employees covered under NPS and will lead to greater pension payouts after retirement without any additional burden on the employee, according to the statement.

Besides, the contributions under tier-II of NPS, which is regulated by Pension Fund Regulatory and Development Authority, will now be eligible for tax exemption up to Rs 1.5 lakh available under 80-C of the Income Tax Act.

This will be at par with other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund, provided there is a lock-in period of three years.

Tier-2 accounts are voluntary in nature and function like mutual funds, permitting withdrawal anytime. Investments in tier-2 accounts weren’t earlier allowed tax exemption.