The National Pension System (NPS) is a formidable retirement tool, which was made even better in 2018. Here’s what changed:
Maturity proceeds become entirely tax-free; Annuity income continues to be taxed, for now
Then: At the time of maturity, subscribers could withdraw 60 percent of their money in a lump sum, but there the tax exemption was applicable only on the 40 percent and the remaining balance of 20 percent of the corpus was taxable.
Now: After attaining the age of 60, the tax exemption limit for lump sum withdrawal on exit has been extended to 60 percent. With this, the entire withdrawal at the time of maturity will now be exempt from income tax.
NPS Potentially to generate high returns
Then: You could invest up to 50 percent in equity. After that, there was no option to go beyond investing in equity.
Now: Under the active choice mode, the subscriber can now invest up to 75 percent equity. The new ruling came in effect from October 1, 2018.
Continue investing in NPS even after retirement
Then: To extend the age up to 70 years, the subscribers need to inform at least 15 days prior to attaining 60 years of age or superannuation.
Now: Extension of entry age can be obtained up to 180 days after attaining 60 years of age or superannuation.
Extension norms in doing partial withdrawals
Then: You could only withdraw 25 percent of the contributions after three years from the date of joining the system and a maximum of three times during the entire tenure of subscription in certain exigencies like health, marriage, house and education.
Now: Apart from partially withdrawing money from exigencies like health, marriage, house and education, you can also withdraw 25 percent of the contributions after three years from the date of joining the system and a maximum of three times during the entire tenure of subscription against skill development activity like startups, new ventures.
Contribution to NPS for central government employees raised to 14%
Then: The government contributed 10 percent of the basic salary of its employees as its contribution. This amount was tax exempt.
Now: The government will contribute a higher 14 percent of the basic salary of its employees as its contribution. However, the employee’s contribution will remain at 10 percent. The increased amount is also tax exempt.
Tax deduction benefit extended to Tier-II account
Then: No tax deduction benefit was allowed under the Tier-II account. You could invest any time and withdraw money anytime from Tier-II account. There was no lock-in period associated.
Now: The contribution made in Tier II account of NPS will have the same tax deduction benefits (up to Rs.1.5 lakh under section 80C of Income Tax Act) compared to other schemes like general provident fund (GPF), contributory provident fund (CPF), employees provident fund (EPF) and public provident fund (PPF).
However, to avail such tax deduction benefit, you need to invest money for a minimum lock-in period of 3 years. The benefit will be available to central government employees only.
Freedom to select pension fund manager and make asset allocation of their own
Then: The Central government employees did not get a choice to decide the investment ratio between equity and debt investments. Investments were done in a pre-fixed asset allocation with equity exposure of not more than 15%. They did not even have the choice of selecting private sector fund managers.Now: Government employees will now get a choice to choose the asset class and make an investment in equity and debt as their need. They will also be allowed to select private pension fund managers.