Launched on January 1, 2004, the National Pension System (NPS) has become a game-changing scheme for the Indian retirement planning industry. Its main objective is to incentivize individuals to make regular contributions to a pension fund during their working life, thereby ensuring secure financial planning in retirement.
The scheme, run jointly by the government and the Pension Fund Regulatory and Development Authority (PFRDA), does not promise a predetermined pension amount but offers the possibility of good investment returns. NPS assets achieved a compound annual growth rate (CAGR) of 37% to reach Rs 276 crore, mainly due to the contribution of 5.8 million non-government customers to this growth. Let’s take a look at the recent changes to NPS.
1. Tax deduction limit
In the Union Budget 2024, Finance Minister Nirmala Sitharaman announced important changes in the tax deduction limits for employer contributions. This adjustment increases the employer contribution base from 10% to 14% of employee wages. As a result, employees can now get an additional deduction equal to 4% of their basic salary on employer contributions to NPS. For example, an employee with a basic monthly salary of Rs 1 lakh can now enjoy an additional deduction of Rs 4,000 per month.
2. NPS Withdrawal
The final exit rules for the National Pension System (NPS) have been revised in 2024. Now, subscribers can withdraw 60% of the total amount as tax-free in one lump sum. The remaining 40% is used to purchase an annuity plan and is not taxed when withdrawn, but is taxed during the annuity payment phase.
If the total assets exceed Rs 5 lakh at the time of retirement, 40% of the total NPS assets should be used to purchase an annuity plan and there will be no tax implications on this part. However, annuity payments will be taxed according to personal income tax brackets.
3. NPS investment allocation
Investment allocation guidelines within NPS have been revised. Current rules state that individuals can maintain up to 75% of their equity investments until age 60. This enables clients to take advantage of investment growth opportunities during their employment.
4. Equity distribution of secondary NPS accounts
The government has increased the equity allocation limit for Tier II NPS account holders from 75% to 100% tax. This adjustment enables investors to increase equity investments within their secondary NPS accounts, potentially increasing upside potential.
5. Direct remittance (D-Remit) service
With the launch of direct remittance (De-Remit) facility, NPS subscribers can now access NVA on the same day to invest. By registering a virtual account number linked to their bank account, investors can take advantage of instant NVA on their donations through the cancellation process. This feature provides important benefits to NPS investors.
6. Systematic one-time withdrawals
From February 2024, NPS subscribers will have the option to withdraw part of their money for various purposes such as funding their children’s higher education, buying or constructing residential properties and paying for medical expenses. Subscribers can opt for Systematic Lump Sum Withdrawal (SLW) to withdraw up to 60% of their NPS funds regularly between the age of 60 and 75 years. The remaining amount can be used in an annuity plan.
