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New Changes In NPS Scheme

IndianMoney.com Research Team | Posted On Tuesday, January 15,2019, 04:38 PM

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New Changes In NPS Scheme

 

 

The Government has made several changes in the National Pension Scheme (NPS), which will come into effect from April 1st, 2019. These changes are very helpful for government employees. Along with higher government contribution for the Central Government Employees covered under NPS, the changes also include withdrawal from the NPS made completely tax-free.

NPS was initially introduced only for government employees, but is now offered to all the citizens of India, including the workers in the unorganized sectors. In this article, we will discuss new changes in the NPS scheme, you must know.

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New Changes In NPS Scheme

What is NPS?

National Pension Scheme is a pension scheme sponsored by the Government of India. This scheme was introduced in the year 2004 only for Government employees. In the year 2009, the Government opened this scheme to all Sections of Society. If you are between 18-65 years, you can join the NPS.

How NPS Scheme works?

Subscribers must contribute regularly throughout their working life. On retirement, the accumulated corpus is divided into two parts, where 60% can be withdrawn immediately and the remaining 40% should be mandatorily used to avail an immediate annuity plan. The annuity plan is bought to secure regular income in retirement.

Investors must choose the investment mix based on the risks they are ready to take. If investors are ready to take high risk for high return, they can opt for equity and if they want to take medium risk they can select debt. On the other hand, if investors are not ready to take any risk, they can opt for pure debt or Government Securities. Usually, equity investment is capped at 50%.

There is one more option called Auto Choice, where the debt-equity mix varies, depending on the subscriber’s age:

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New changes in NPS Scheme:

1. Tax on NPS withdrawal:

Many people have a question, Is NPS withdrawal 100% tax-free? Yes, as per the new changes, NPS withdrawal is made completely tax-free. Subscribers don't have to pay any tax on the 60% of corpus withdrawn on retirement. Earlier it was not completely tax-free, part of the amount withdrawn was taxable.

As soon as subscribers turn 60 years, they are allowed to withdraw 60% of the accumulated corpus. Earlier, out of 60% of the amount withdrawn, 40% was tax-free and the remaining 20% was taxable. But, as per the new changes, the amount withdrawn on maturity is completely tax-free. It is applicable to both government and private subscribers. This change in rules makes NPS similar to other long-term saving instruments like PPF and EPF. However, NPS still doesn’t enjoy the EEE benefit.

2. Government contribution towards NPS

The new changes in NPS will make Central Government employees covered under NPS happy, because government contribution to the National Pension Scheme (NPS) will be increased to 14%. As of now, the government contribution to NPS is 10% of basic salary and after April it will be increased by 4%. But, the minimum employee's contribution will remain the same at 10%.

This change in the rule will help nearly 18 Lakh central government employees covered under NPS. This will also increase Government’s expenditure to around Rs 2,840 Crores annually.

3.  Investment

There is one more piece of good news for central government employees covered under NPS, as they will be given flexibility in terms of choice of pension fund managers. They are provided with more choice in patterns of investment like debt and combination of equities and debt.

4. Income tax benefits

As per the new changes, the contribution made by government employees under the Tier-II of NPS will be tax deductible up to Rs 1.50 Lakh under Section 80C of the income tax act. It is tax deductible only if there is a lock-in period of 3 years.

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What are Tier 1 and Tier 2 NPS accounts?

Tier 1 NPS accounts are meant for retirement savings and under this type, subscribers will not be allowed to withdraw the savings till retirement. But, in the case of Tier II account, subscribers can withdraw the savings whenever he wishes.

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