The National Pension System (NPS) of India is undergoing significant modifications to make it more appealing and effective for its 18 lakh Central government employees. The Union Cabinet has granted approval for these changes which are aimed at enhancing the overall pension system.
Approved Changes to National Pension System
The approved changes to the NPS include: increasing the mandatory contribution by the Central Government from 10% to 14% for its employees covered under NPS Tier-1; providing freedom of choice for the selection of Pension Funds and investment patterns; compensation for non-deposits or delayed NPS contributions between 2004-2012.
Importantly, the tax exemption limit for lump sum withdrawal on exit has been raised to 60%. This implies that the entire withdrawal will now be tax-free. The income tax exemption previously only applied to 40% of the total accumulated corpus used for the purchase of an annuity.
Financial Impact and Benefits
The increases in contributions and tax benefits are expected to result in a more substantial final corpus for all central government employees covered under the NPS. Other benefits include larger pension payouts after retirement without employee burdens and freedom of choice for Pension Funds selection and investment patterns.
The changes are also designed to attract and retain the best talent in government employment. The estimated impact on the exchequer from these changes is around Rs. 2840 crores for the financial year 2019-20.
| Impact Details | Estimated Cost |
|---|---|
| Increase in mandatory contribution | Rs. 2840 crores (FY 2019-20) |
| Freedom of pension fund selection | No additional cost |
| Compensation for non-deposits | Included in mandatory contribution |
| Increased tax exemption limit | Reduced tax revenues |
Background and Recommendation
The Seventh Pay Commission recommended these changes in 2015. The Commission suggested establishing a Committee of Secretaries for addressing the concerns regarding the NPS. Based on these recommendations, a draft Cabinet Note was placed before the Cabinet for approval.
National Pension System Overview
The National Pension System (NPS) was introduced by the Central Government with effect from January 01, 2004 (except for the armed forces). The Pension Fund Regulatory and Development Authority (PFRDA) regulate it. The National Pension System Trust (NPST), set up by the PFRDA, owns all assets under the NPS. The structure is into two tiers: Tier-I, a non-withdrawable retirement account and Tier-II, a voluntary withdrawable account.
NPS Eligibility
The NPS became available to all Indian citizens from May 01, 2009. Any individual Indian citizen (resident or Non-resident) aged between 18-65 years (as on the date of submission of the NPS application) can join the NPS. However, OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) cardholders and Hindu Undivided Family (HUFs) are not eligible for opening an NPS account.
About Pension Fund Regulatory and Development Authority (PFRDA)
The PFRDA Act was passed on September 19, 2013. The vision of the PFRDA is to be a model regulator for the promotion and development of an organized pension system. Along with the NPS, it also regulates other pension schemes subscribed to by employees of the public and private sectors of India.