NPS Becomes more Attractive after Budget

Budget 2019 among many things also notified following 3 changes in NPS – which would make it more attractive to investors. 

1. NPS withdrawal becomes Tax free
2. NPS Tier II now under 80C (only for Central Govt employees)
3. Contribution increased in NPS to 14% for Government Employees

The post give details for all the above point.

NPS Withdrawal is Tax Free

NPS until now was partially taxable at the time of withdrawal. Out of the entire NPS corpus, minimum 40% has to be used to buy annuity. This withdrawal was tax free but the amount received on annuity is taxable as per tax slab. Out of the remaining 60% – 40% was tax free while the 20% of NPS corpus was taxable. 

With the new notification in Budget 2019, the entire 60% lump-sum withdrawal is tax free. The union cabinet had approved of the above decision last year but has been notified only in the Finance Bill 2019. 

Also Read: NPS – Maturity, Partial Withdrawal & Early Exit Rules

Employer NPS Contribution increased to 14% for Government Employees

The employer contribution for government employees in NPS has been increased to 14% of their (Basic Salary + Dearness Allowance). The good thing is this contribution tax exemption has too been hiked from 10% to 14% u/s 80CCD(2) for government employees. However, the tax exemption limit remains 10% of salary for all others.

I think this is regressive policy to differentiate between government & non-government employees. It just complicates rules and also government employees make rules which does not impact them!  

Read: NPS Tax Benefit u/s 80CCD(1), 80CCD(2) and 80CCD(1B)

NPS Tier II now eligible for Tax Saving u/s 80C

Starting FY 2019-20, Central Government employees can invest in NPS Tier II account to save tax u/s 80C. The lock-in period for the investment is 3 years. Other people’s investment in NPS Tier II is still not eligible for 80C deduction. 

I do not see any specific reason as to why anyone should choose NPS Tier-II for tax saving investment given that there are multiple better options already available u/s 80C. 

To Conclude

The long standing demand of making NPS tax free if finally here. This is good move and help people get some more on retirement.