NPS Contribution Post Budget 2018: What’s New?

By | February 12, 2018

Non-salaried subscribers of NPS can now rejoice! The proposed Budget 2018 puts them at par with salaried individuals. Find out more. 

A slew of measures proposed in Budget 2018-19 disappointed many. Among the good news, the Budget increased the take-home pay for women in the workforce. But it took away the medical and travel allowances of the salaried class. Senior citizens, however, got a reason to cheer.

For non-salaried subscribers, the Budget 2018-19 has proposed a tax exemption of 40% of the total amount payable to the National Pension System (NPS) on the closure of the subscriber’s account or on his opting out of the scheme. This puts the tax benefit of non-salaried individuals at par with salaried individuals.

More in detail about the new provision on NPS:

The existing provision of Clause (12A) of section 10 of the Act stipulates that an employee contributing to the NPS is allowed an exemption in respect of 40% of the total amount payable to him on the closure of his account or on his opting out. This benefit was not available to non-employee subscribers earlier.

The Budget 2018-19 proposes to amend clause (12A) of section 10 of the Act. This will extend the said benefit to all subscribers. This amendment will come into effect from April 1, 2019, and will apply to the assessment year 2019-20 and subsequent assessment years.

Additional Reading: Union Budget 2018 Highlights

Eligibility of NPS deductions under the Income Tax Act:

Contributions to NPS fall under different sections of the Income Tax Act-Section 80CCD (1), Section 80CCD (1b) and Section 80CCD (2). The table below will give an idea of various deductions offered by NPS:

What is deductible Maximum deduction Section
Mandatory deduction from salary for retirement Rs. 1.5 lakh 80CCD (1)
Voluntary deduction from salary put in NPS by employer 10% of basic salary 80CCD (2)
Voluntary contribution by the individual in NPS Rs. 50,000 80CCD (1b)

In the 2016 budget, the government had introduced an additional benefit for investment in NPS under a different section of the IT Act. If the taxpayer contributes more than Rs. 1.5 lakh to NPS in a year, the amount in excess of Rs. 1.5 lakh can be claimed as a deduction under the new Section 80CCD (1b) up to a limit of Rs. 50,000.

Over and above the cap of Rs. 1.5 lakh provided under Section 80C and limit of Rs. 50,000 under Section 80CCD (1B), the contribution from the employer up to 10 percent of basic salary along with dearness allowance is also eligible for deduction under Section 80CCD (2). There is no ceiling limit in terms of the amount on this tax deduction, and it is available only to employees.

Additional Reading: Union Budget Proposes LTCG For Equities: What It Means For You

Taxation on NPS corpus:

The NPS is a voluntary, defined-contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. Under the NPS, individual savings are pooled into a pension fund which is invested by the Pension Fund Regulatory and Development Authority (PFRDA) regulated professional fund managers as per the approved investment guidelines in diversified portfolios comprising government bonds, bills, corporate debentures, and shares.

Currently, the NPS corpus is only partially taxed. While 20 percent of the withdrawal still remains taxable, 40 percent of the accumulated corpus at the time of withdrawal is non-taxable and the remaining 40 percent has to be mandatorily invested into annuities. Investors have to buy annuities from insurance companies to provide a monthly payout in the form of pension.

At the time of normal exit from the NPS, subscribers can use the corpus under the scheme to purchase a life annuity from a PFRDA empanelled Life Insurance company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they decide to do so.

Currently, NPS is exempt-exempt-taxable which means you need to pay tax at the time of withdrawal. This makes it a less attractive savings option vis-a-vis investments like PPF and PF that enjoy EEE (exempt-exempt-exempt) status.

Additional Reading: Opening An NPS Account Online

For long, the PFRDA has been demanding a level playing field for NPS.  In other words, it should enjoy EEE status like Employee Provident Fund (EPF) and Public Provident Fund (PPF). Once the scheme gets EEE status, the final lump-sum that an individual receives at maturity will not be taxable.

While this may take some time to turn into reality, exploring Savings and Investment options on BankBazaar will only take you minutes. So why wait?

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