Post my two articles on National Pension System (NPS), the cabinet has made certain important amendment to NPS on 6th December, 2018. There is confusion galore in the minds of taxpayers about the implications and applicability of the decisions. Let us discuss.
Increase in the contribution to be made by the central government to the NPS
Presently the Central Government contributes 10% of salary to NPS account of its employees. The cabinet has decided to increase this to 14% of salary. It may be noted that there is no requirement to make corresponding increased contribution by the central government employees. So for the central government employees, it is a win win situation as they will be able to accumulate a substantially higher contribution at the time of their exit from the scheme without having to contribute a single penny additionally to their NPS account. With increased life expectancy without corresponding enhancement of retirement age, the salaried have to fend for themselves for longer period of retirement with the same working period for accumulation of the retirement kitty. This decision will help the central government employees to have higher corpus while living longer and increased costs of living. This change will certainly trigger demand for change in the contribution by other state governments in due course.
Presently an employee can claim deduction in respect of contribution made by the employers under Section 80 CCD(2) of the Income Tax Act, upto 10% of the salary as the employer’s contribution is included in the salary of the employee. So though the central government may start contributing higher sum to the NPS account of the employee, tax benefit for the same would still be restricted to 10% till the Income Tax Act is amended, which is bound to happen in all the probabilities with retrospective amendment to allow the benefit of increased contribution.
Moreover, since there is no absolute monetary limit for tax benefit on the contributions made by the employers to your NPS account as long as it does not exceed 10% of the salary, the central government employee will not be liable to pay any tax on the increased contribution after the amendment.
Choice to select Pension Funds and pattern of investment
The cabinet decision also proposes to let the central government employees chose their pension fund and the composition of investment in equity, debt and government securities which hitherto was not available to them This will be beneficial for the subscribers as they will have wider choice in terms of fund house as well as the choice of the composition between the three asset categories.
Benefit for contribution toward tier II account
A person opening an NPS account has to open an NPS tier I account and has option to open tier II account as well. Presently tax benefits are available for contributions made to tier I account only and no tax benefits are available for contribution made towards tier II account. The cabinet decision proposes to extend the tax benefit for contribution made toward tier II account under Section 80C. The only condition for availing this benefit is that the contribution will have a lock in period of three years. This offers an excellent opportunity to central government employee to save tax by investing in a product having a tenure as short as three years. There is only one other product namely Equity Oriented Saving Scheme (ELSS) with similar tenure of three years. The beauty of the proposal to allow contribution to tier II account is that this offers the subscriber tax benefit for making investment in a debt product which is not as risky as an ELSS, the other product with similar tenure but having higher risks associated with equity investments. With the options to chose the fund mangers and the compositions now available with the changes proposed, the central government employees will be able to save tax by investing in debt product of three years.
Presently only a tax saving fixed deposit offers you the tax benefit which is a debt product but has a lock in period of five years. This change will also need amendment in the Income Tax Act to take effect.
Enhancement of the exemption limit for withdrawals at retirement
Presently a subscriber can withdraw 40% of the corpus atthe time of eixt which comes to him tax free. He also has to buy an annuity for minimum of 40% of the corpus accumulated at the time of exit. For the balance 20% he has the option to withdraw and pay tax thereon or buy an annuity for it and defer the tax.
The cabinet decision proposes to raise the exempt withdrawal from 40% to 60% tax exempt at the time of exit and buy an annuity for balance 40%. This change is claimed as one which bring this product on parity with other products like Employee Provident Fund (EPF) and Public Provident Fund (PPF). In actual practice this is not so. For PPF and EPF your 100% corpus is tax exempt as you do not have to invest in the low yield product like annuity. The government should either make buying of annuity mandatory for EPF at the time or retirement or leave the requirement to buy an annuity of 40% of corpus optional for NPS subscribers to make these products truly comparable.
To whom these decisions are applicable
Though the benefits of NPS can be availed by every tax payer who is citizen of India, the decisions are applicable to the employees of the Central Government only. So benefits of these decisions will not be available to the employees of the government companies like Life Insurance corporation of India, food corporation of India, the public Sector Companies etc. The benefit will not apply to the employees of state government as well as other local authorities like municipal corporations.
Simple Tax India:However it is expected that necessary changes to includes all such excluded persons will be made by the concerned quarters.