New Delhi: The Union Cabinet has increased the governments contribution to the National Pension Scheme (NPS), allowed higher tax-free withdrawal of funds on retirement and provided subscribers the option of allocating higher investments in equity.
Higher equity allocations would add to the flow of funds to the stock market.
The changes will benefit central government employees, who have been enrolled for NPS since January 1, 2004.
The governments contribution to NPS will be increased to 14 per cent of salary from 10 per cent, while the contribution of employees will remain unchanged. The total outgo will go up very marginally and will have no impact on the fiscal deficit, said a person familiar with the developments.
Besides, additional contributions by employees will be eligible for tax benefits under section 80C of the Income Tax Act within the Rs 1.5 lakh limit.
Employees will be able to withdraw up to 60 per cent of the total funds accumulated at the time of retirement free of tax, up from 40 per cent at present. The limit is the same for private subscribers, who are required to purchase an annuity for 40 per cent of the amount.
Retiring employees will have the option of converting the entire amount to annuity and a rough calculation shows that in such a situation, their monthly pension could be as much as 53 per cent of the last basic salary drawn.
Employees would be allowed to allot a larger share of their funds for investment in stocks with the aim of accumulating a higher corpus. Under the current rules, 85 per cent is invested in fixed income instruments and 15 per cent in equity and equity-linked mutual funds. Private subscribers can opt for up to 50 per cent in equity under tier-1 accounts.
“Some of these measures need changes in the Income Tax Act, which can be done through the Finance Bill. This means the modified NPS could be in place from the next financial year,” the person said.