The Union Budget of 2019 has transformed the National Pension Scheme into an exempt-exempt-exempt (EEE) product. This means that the lump sum amount available for withdrawal to the subscribers on retirement, or at the age of 60 years, will be entirely exempt from tax. This announcement of the government has bolstered the popularity of this pension scheme by bringing it at par with other long-term investments like the Public Provident Fund (PPF) and Employees Provident Fund (EPF). While this tax-free benefit is available to all subscribers, you must note that the benefit will take effect from the assessment year of 2020-2021.
Before knowing the details of the new NPS regulation, which has turned the National Pension Scheme into an EEE product, you must know the key features of the scheme.
Understanding the National Pension Scheme: The union government implemented this social security initiative on May 1, 2009. Here, except for the personnel of armed forces, employees of public, private and unorganised sector can become a part of the scheme. NPS encourages employees of all the three sectors to invest in their pension account regularly. After retirement, the employees can withdraw a part of the corpus, and avail the rest as monthly pensions. The scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA). On joining the scheme, every subscriber is provided with a unique Permanent Retirement Account Number (PRAN).
Understanding the functioning of the NPS: There are two accounts, Tier-I and Tier-II account in this scheme. Tier-I is a compulsory, non-withdrawable account. You can withdraw the amount only after meeting the prescribed exit conditions under the NPS. On the other hand, Tier-II is a voluntary savings facility available as an add-on to the Tier-I account. You are free to withdraw your savings from this account. As per the rules, there are eight private-sector Pension Fund Managers (PFMs) to choose from. You can refer to the following chart to understand the returns on this market-linked scheme:
What was the earlier taxation norm for withdrawal on retirement?
As per the NPS rules, any subscriber on reaching the age of 60, or on retirement, can withdraw 60% of the accumulated corpus, while the remaining 40% has to be used to purchase annuities. Of this 60%, only two-thirds or 40% of the corpus was exempt from tax, while the remaining one-third, or 20%, was taxable. This made the NPS an EET product, which meant that while contribution and accumulation remained tax-free, the withdrawal was taxable.
How has the new NPS regulation turned it into an EEE product?
According to the new NPS regulation, the scheme is now completely exempt from taxation at the withdrawal stage. This now makes this pension scheme an exempt-exempt-exempt (EEE) product vis-a-vis its earlier status as an EET product. To put it simply, all three stages of the scheme comprising contribution, accumulation and withdrawal are tax-free. As a subscriber, you will get full tax exemption on the 60% of the corpus that you are allowed to withdraw on maturity. But you must remember that the annuity continues to remain taxable according to your income slab.
Benefits of the NPS as an EEE product: Despite being a low-cost investment focused on retirement, many investors hesitated before subscribing to the scheme as the corpus was taxable on maturity. But as the new NPS regulation has turned it into an EEE product, both potential investors and existing subscribers will pay less tax upon withdrawal. You must, however, note that taxation will not be zero as the remaining 40% of the corpus has to be invested in an immediate annuity scheme for receiving pensions. The pension amount is taxable according to your income slab. Also, with the NPS becoming an EEE product, this investment is now at par with other long-term investment products like Public Provident Fund (PPF) and Employees Provident Fund.
With tax-exempt limit enhancement, the National Pension Scheme has now become an EEE product. It remains a safe and reliable mode of investment with a slew of benefits like providing the flexibility to choose from various PFMs and modes of investments, besides offering a wide range of tax benefits. If you are thinking of participating in the NPS, you can avail the benefits of the scheme of Finserv MARKETS. Participating in the scheme on this platform provides you with 100% transparency. There are no hidden charges, and no information is ever withheld from customers. You can say goodbye to the cumbersome process of making branch visits and instead apply online for the scheme. The online process also ensures that you can access your account from anywhere and at any time. On Finserv MARKETS, you can also enjoy the benefit of flexibility of investment distribution along with the choice to select from a wide range of investment options and fund managers.
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