Government's contribution to National Pension Scheme hiked to 14%

With an aim to woo around 36 lakh central government employees and their families in view of the upcoming general elections, the BJP-led Union government on Monday announced big changes to the National Pension System (NPS). Union finance minister Arun Jaitley said the central government's contribution to the National Pension System has been enhanced to 14 per cent from the current 10 per cent. The minimum employee contribution stands at 10 per cent.

The announcement came a day before the results of assembly elections in five states—Madhya Pradesh, Rajasthan, Chhattisgargh, Telangana and Mizoram—are to be declared on Tuesday. The decision will increase an additional burden of Rs 2,840 crore to the exchequer for the 2019-20 fiscal, Jaitley told media at a briefing in North Block.

Though the decision was taken at a cabinet meeting on December 2, the announcement was put on hold due to the state elections. 

"The move will increase the eventual accumulated corpus of all central government employees covered under NPS. It will also provide greater pension payouts after retirement without any additional burden on the employee," Arun Jaitley said while adding that the 7th pay commission had recommended the constitution of a committee of secretaries to examine NPS rules for government employees and subsequently the government had held an inter-ministerial consultation after the panel of secretaries gave their recommendations for the changes.

Presently, the new entrants to the central government service on or after January 1, 2004 are covered under the NPS. NPS is being implemented and regulated by the Pension Fund Regulatory and Development Authority.

"Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60 per cent," Jaitley said while adding that the entire withdrawal will now be exempt from income tax. Jaitley also said that out of 60 per cent of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40 per cent is tax exempt and balance 20 per cent is taxable.

He also announced that the contribution by the government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of three years.

The decision also provides freedom of choice for selection of pension funds and pattern of investment to central government employees.

The proposed changes to NPS would be made applicable immediately once critical decisions are taken in consultation with the other ministries or departments concerned, Jaitley further said.

It will impact augmenting old-age security at a time of rising life expectancy and by making NPS more attractive, government will be facilitated in attracting and retaining the best talent.