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Government’s contribution under NPS to be raised to 14% from 10%, entire 60% of withdrawals to be tax-free


New Delhi: The Union Cabinet on Monday approved a few changes in the National Pension System (NPS) under which the mandatory contribution by the central government for its employees covered under NPS Tier-I will be hiked from the existing 10 percent to 14 percent.

The tax exemption limit for lump sum withdrawal on exit has been enhanced to 60 percent. With this, the entire withdrawal will now be exempt from income tax. At present, 40 percent of the total accumulated corpus utilized for purchase of annuity is already tax exempted. Out of 60 percent of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40 percent is tax exempt and balance 20 percent is taxable.


The Cabinet also decided that contribution by the government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of 3 years.

Under NPS account, two sub – accounts – Tier I and II are provided. Tier I account is mandatory and the subscriber has option to opt for Tier II account opening and operation. Tier – II account is a voluntary savings facility available as an add – on to any Tier – 1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish.

The proposed changes to NPS would be made applicable immediately once time critical decisions are taken in consultation with the other concerned Ministries / Departments, an official release said.