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Government makes NPS withdrawal 100percent tax exempt

The government has made the National Pension System (NPS) more attractive for investors, with the biggest bonanza going to 18 lakh central government employees. The Centre will contribute 14% of basic salary to their pension corpus, up from 10%. The employee’s contribution will remain at 10%, bringing the total contribution to 24%. 

Announcing the changes on Monday, finance minister Arun Jaitley
said the entire withdrawal at the time of retirement would be tax free. 

The NPS was launched in January 2004 for government employees and was opened to private sector employees in 2009. 

At present, 40% of the total accumulated corpus utilised for purchase of annuity is tax exempt. 

Of the remaining 60% corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and 20% is taxable. The tax exemption is now extended to the entire 60%. 

Jaitley said the exact date from which these changes would come into effect would be notified soon, adding that normally such changes are made from the new financial year since they require changes in the finance bill. 

Sources told agencies the government can start enhanced contribution beginning January but tax benefit would be available from the next financial year. 

Taking into account 18 lakh employees, the additional burden on the government due to enhanced contribution would be Rs 2,840 crore in 2019-20. 

Speaking on the occasion, economic affairs secretary Subhash Chandra Garg said the choice for employees would also expand in terms of fund managers. They can choose from the list of eight rather than three fund managers at present, he said.

Garg said the government employees will now have more investment options too. He said one option would be to invest up to 25% of the corpus in equity, another where up to 50% of fund would be invested in equity and the third very conservative option of investing 100% in government securities. 

Contribution by the government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs 1.5 lakh for the purpose of income tax. This is same as schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund (EPF) and Public Provident Fund (PPF) provided that there is a lock-in period of three years. There had been a long pending demand to bring NPS in the EEE (exempt-exempt-exempt) category .

Asked if the state government, too, would follow suit, the FM said respective state governments would decide if they would like to follow the central government model or not. 


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