Budget 2019 makes National Pension Scheme effectively tax free

Finance Minister Nirmala Sitharaman on July 5 announced that the Finance Bill will give effect to the cabinet decision of increasing the limit of exemption from current 40 percent to 60 percent of payment on final withdrawal from NPS.

It also allows a deduction for the employer’s contribution up to 14 percent of salary from the current 10 percent, in case of the central government employees. The bill also includes the decision of allowing deduction under section 80C for a contribution made to Tier II NPS account by central government employees.

This brings in a big relief to the subscribers of NPS. This decision brings NPS almost at par with the employee provident fund (EPF).

Last year, the Union Cabinet had announced that 60 percent of the withdrawal from national pension scheme (NPS) will be tax-free in the hands of the investor. Since the remaining money is used to purchase annuity it was a case of making withdrawal almost tax free. However, this decision was not notified. The finance bill presented in Lok Sabha when passed will make NPS a much better tool to plan for retirement.

Each year individual investors can enjoy a tax break by investing up to Rs 50,000 in NPS under section 80CCD. The NPS lets individuals invest in equities, government securities and corporate bonds. The low cost of management charged by way of a low expense ratio of 0.1 percent makes it even more attractive. NPS along with traditional investment options such as EPF can help an individual build a large corpus for retirement.