Govt raises NPS contribution by 4%

In an election-year bonanza to its employees, the Centre on Monday decided to raise its contribution to the National Pension Scheme (NPS) to 14% of the employees’ basic salary from the current 10%, a move that could cost the exchequer an additional Rs 2,840 core in 2019-20. Minimum employee contribution will, however, remain at 10%, Finance Minister Arun Jaitley said, announcing the decision, which according to him, was taken in the larger interest of employees.

At present, the government and its employees contribute an equal amount of 10% of basic salary to NPS.

The Union Cabinet, headed by Prime Minister Narendra Modi, had taken the decision at its meeting last week.

Also, government employees will be allowed to withdraw more lump sum at the time of retirement. The Centre allowed government employees to commute 60% of the fund accumulated at the time of retirement, up from 40% .

“Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60%,” Jaitley said, adding that the entire withdrawal will now be exempt from income tax.

At present, out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and 20% is taxable. The government employees will now have the option to invest in either fixed income instruments or equities.
In addition, the government also gave NPS the same tax benefit as the Employees’ Provident Fund by giving it ‘EEE’ (exempt, exempt, exempt) status.

The EEE tax treatment means the money is exempt from taxes at the time of investment, accumulation and withdrawal.

At the time of investment, the tax deduction is under the limit of Section 80C of the Income-tax Act, which is currently Rs 1.5 lakh.

NPS until now enjoyed EET status under which the investment was taxed at maturity..