Govt Ups NPS Con­tri­bu­tion , Al­lows Higher Eq­uity Play

The Economic Times - - Markets: Beating Volatility - Our Bureau

New Delhi: The Union Cab­i­net has in­creased the gov­ern­ment’s 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 gov­ern­ment’s con­tri­bu­tion to NPS will be in­creased to 14% of salary from 10%, 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 ₹ 1.5 lakh limit.

Em­ploy­ees will be able to with­draw up to 60% of the to­tal funds ac­cu­mu­lated at the time of re­tire­ment free of tax, up from 40% at present. The limit is the same for pri­vate sub­scribers, who are re­quired to pur­chase an an­nu­ity for 40% 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% 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% is in­vested in fixed in­come in­stru­ments and 15% in eq­uity and eq­uity-linked mu­tual funds. Pri­vate sub­scribers can opt for up to 50% 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.

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