Employees would now be able to withdraw up to 60 percent of their pension fund tax-free, Union Finance Minister Arun Jaitley said on Monday. Before this, the limit for tax-free withdrawal of pension was 40 percent, but one needed to pay tax on the balance 20 percent.
The Cabinet also raised the employer (government) contribution in the National Pension Scheme (NPS) for Central Government employees to 14 percent from 10 percent.
The Cabinet also approved tax incentives for government employees’ under Tier-II of NPS. Contribution by those employees will now be covered under Section 80C of the Income Tax Act for deduction of up to Rs. 1.5 lakh. To avail this tax-benefit, there has to be a compulsory lock-in period of three years.
“The deduction will be up to 1.5 lakh covered under the NPS scheme”, Jaitley said.
More choice available to employees
Employees would be able to choose where to invest their money. Currently, there is a ‘standard plan’, which is largely debt-oriented, where employees can invest (investment in equity is capped at 15 percent in the standard plan). After the new measures are passed, employees would have a choice to invest in various kinds of schemes. These are:
- Schemes investing in 25 percent equity – conservative life cycle fund (low risk)
- Schemes investing in 50 percent equity – moderate (suitable for younger investors)
- Schemes investing in 100 government securities (very conservative in nature)
“Tax exemptions, both the provisions, are for everyone. It is only the government contribution that has been enhanced,” Economic Affairs Secretary Subhash Chandra Garg told reporters during the press conference.
However, the finance minister did not say when the changes to NPS would come into effect and said the date “will be given quite soon”.
Currently, the government as well as employees have equal contribution of 10 percent of basic salary to NPS. While the government’s contribution will be higher after the decision is implemented, employees will continue to contribute 10 percent.