Income tax benefits on NPS: New rules that came into effect this year
The government has been amending NPS or National Pension Scheme rules to make the pension scheme more subscriber-friendly. Most recently, the government had raised income tax exemption limit for lumpsum withdrawal on maturity from NPS to 60%, from 40% earlier. NPS, which was initially notified for central government employees joining service on or after January 2004 and subsequently adopted by almost all state governments for its employees, was extended to all citizens of Indian on voluntary basis from May 2009. It was extended to non-resident Indians or NRIs in October 2015. As October 2019, more than 66 lakh government employees have been enrolled under NPS and 19.2 lakh subscribers have subscribed to NPS in the private sector.
Here are 5 things to know about recent changes in NPS rules:
1) In Union Budget 2019, the government had raised income tax exemption limit for lumpsum withdrawal on maturity from NPS to 60%, from 40% earlier. The remaining 40% of the corpus is already tax-exempt as it is mandatorily utilised for annuity purchase.
2) For central government employees, the Income Tax Act has been amended to allow exemption of employer contribution up to 14% of the salary of central government employees. This additional benefit is not applicable for private sector employees, for whom employer contribution up to 10% is tax-free.
3) Central government employees also get another additional benefit. Their own contribution to NPS Tier II account qualify for income tax benefits under Section 80C, provided the money is locked in for a period of three years.
4) Overseas Citizens of India (OCI) – people of Indian origin holding citizenship of other countries – have been allowed to invest in the Tier 1 scheme of NPS, making them at par with non-resident Indians or NRIs. However, both NRI and OCI subscribers cannot invest in Tier II account of NPS.
NPS, which is a defined contribution pension plan, comes with two type accounts. The Tier 1 account or the pension account, gives tax benefit and is mandatory. Tier II account, an optional account, comes with withdrawal flexibility.
5) From August this year, the charges for NPS subscribers increased marginally after NPS Trust also allowed recovery of administrative charges/expenses @0.005% per annum. NPS Trust had in January stopped recovery of administrative charges/expenses that it used to charge @0.005% per annum of AUM on daily accrual basis to meet its expens