Bigger retirement kitty for central govt employees along with tax benefits

The Union Cabinet in its meeting on December 6, 2018, approved the proposal to enhance the mandatory contribution by the central government for its employees covered under the National Pension System (NPS) tier-I schemes, from the existing 10 per cent to 14 per cent of basic salary. This, along with a few other changes, is expected to enhance the popularity of NPS. 

“A 4-percentage-point higher contribution by the central government over a 30-35-year span will raise the corpus employees end up with and enhance old-age security when lifespans are rising,” says Sumit Shukla, chief executive officer, HDFC Pension Fund Management. 

According to Malhar Majumder, partner and consultant at Positive Vibes Consulting & Advisory, “This in effect means an increment of 4 percentage points, which will be tax-free.” 

It is not clear if employee contribution will also be hiked. “Hiking the employee portion in the same proportion will benefit individuals further,” says Preeti Khurana, a chartered accountant with Cleartax.in.  

The enhancement of the tax exemption limit on lump sum withdrawal is also being seen as a welcome step. Earlier, if you had Rs 100 at retirement, a minimum Rs 40 had to be used to buy an annuity. This portion was not taxed. Of the balance Rs 60 which could be withdrawn lump sum, Rs 40 was not taxed, while Rs 20 was taxed at slab rate. Now, the entire Rs 60 will not be taxed. 

“It remains to be seen whether this provision will apply to all members of the NPS or just to central government employees. One complaint investors had against the NPS was that the maturity proceeds were not tax-free, as is the case with Public Provident Fund. But now the government has taken care of this issue,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Securities and Exchange Board of India-registered investment advisor. 

Now, any contribution made by central government employees to tier-II schemes will get deduction under Section 80C. It will come with a lock-in of three years. This brings the NPS tier-II scheme on a par with Equity Linked Savings Schemes. Investors will have to choose from these options based on risk appetite. “The government has yet to clarify how tier-II NPS funds will be taxed at withdrawal,” says Khurana.

Central government employees will now have the freedom to choose their pension fund managers (PFMs). “Now they will also be able to choose from all the PFMs, including private ones, based on performance,” says Shukla.