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VKJ Law Offices of Vinay K. Jain Advocates & Solicitors

Government makes National Pension Scheme (NPS) tax friendly for investors with complete tax exemption to 60% of amount withdrawn on maturity

National Pension Scheme (NPS) is a government-sponsored pension scheme launched in January 2004 for government employees and opened to all sections in 2009. The scheme allows subscribers to contribute regularly in a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income after retirement.
The government has made the NPS more tax friendly by offering complete tax exemption to the 60% of the corpus that an investor can withdraw on maturity. When they retire, NPS investors have to use 40% of the corpus to buy an annuity and can withdraw the remaining 60% of the corpus. Till now, only 40% of this withdrawn amount was tax free, while the remaining 20% was taxed.

This reforming step by the government has brought delight for NPS subscribers now, that 60% of the corpus will be tax free on maturity, NPS will now be comparable with the Public Provident Fund and Employee Provident Fund and other financial products.

In another major change, the mandatory contribution by the Central Government for employees covered under NPS has been enhanced from the existing 10% of salary to 14%, this generate a pension equal to 64% of the last drawn salary. This assumes that the employee’s income (and NPS contribution) will rise 7% every year. However, it is not clear how gains from investment in NPS will be taxed.

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