The Cabinet is understood to have approved some flexibility to the National Pension System (NPS) so as to benefit over 3 million Central government employees.

It has now been decided that the government’s matching contribution for NPS to every government employee will be increased to 14 per cent as against 10 per cent earlier.

Currently, both the employee and the government provide equal contribution of 10 per cent. Now from a date to be decided the government contribution will go up to 14 per cent, official sources said.

Another big benefit is that at the time of retirement, the employee can now withdraw up to 60 per cent as against 40 per cent. This would mean that amount of mandatory annuity corpus will be 40 per cent of the retirement funds.

The government also proposes to bring tax breaks for the employee contribution towards NPS, sources added.

As some of these decisions require amendment to the Finance Act, the Centre is likely to bring amendments in the Budget session.

“Some of these measures need changes in the Income-Tax Act which can be done through Finance Bill. This means, the modified NPS could be in place from next fiscal,” a source told. Asked about the financial implication, he said that total outgo will go up very marginally, hence no impact on the fiscal deficit.

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State govt employees

Barring West Bengal, all other States adopted NPS for their new employees and contribution is same, that is, 10 per cent each by the employee and the employer. It is understood that State Governments will have the option to the continue with the existing formulae or go with Centre.

Proposed changes
  • The government’s contribution will be enhanced to 14% from 10%. There will be no change in the employee’s share of 10%.
  • Additional contribution will be eligible for tax benefit under Section 80C of the Income Tax Act. It means any shortfall in the limit under this Section can be met from contribution towards NPS.
  • Employee will get 60% of total corpus at the time of retirement against 40% now. There will be no income tax on this amount.
  • Employee will have the freedom to convert entire 100 per cent into annuity. In that case, monthly pension could go up to 53% of last basic salary.
  • Option to choose higher investment in equity. At present, pension fund managers invest the funds in the proportion of 85 per cent in fixed income instruments and 15 per cent in equity and equity-linked MFs.