7th Pay Commission NPS Changes introduced recently are indeed a boon for the central government employees. The five changes made to the National Pension System (NPS) firstly make it EEE i.e. fully exempted from income tax, secondly the government’s contribution to NPS has been raised to 14% than 10% earlier; thirdly, central government employees now have the choice to allocate assets as compared to 15% fixed equity; fourthly, investments in Tier-II will be eligible for deductions under section 80C with a lock-in period of 3 years (similar to ELSS); lastly, interest will be paid from the NPS in case of delayed disbursal.

Talking about Income Tax Neutrality and EEE status, the 7th Pay Commission recommended that, “Withdrawals under the NPS should be tax-exempt to place NPS at par with other pension schemes. The Commission also recommends that the service tax levied at the time of annuity purchase by NPS subscribers should be exempted.”

The 7th Pay Commission’s move will ensure a bigger-fatter retirement corpus for the central government employees and a handsome take home amount, however, if we take a closer look, more changes have to be brought in to effect in order to benefit the central government employees fully from the above mentioned five amendments.

Although, the central government will contribute 14% to the NPS now as stated in the 7th Pay Commission’s report, while employee’s contribution will stay at 10% only; however, additional 4% may not be eligible for tax deduction as under the Income Tax Act, employer’s contribution can be claimed for deduction upto 10% only. Thereby, to benefit the central government employees fully and bring in complete tax neutrality, change in the deduction limit for employer’s contribution in the Income Tax Act must also be introduced simultaneously.

Similarly, now the central government employees can withdraw 60% of their NPS as tax free but they still need to utilize 40% for buying annuities of any IRDAI governed insurance company. However, to bring full advantage to NPS holders, the government must make the annuity buying optional as is the case with EPF and PPF.

The 7th Pay Commissions’s recommendations for the National Pension System (NPS) will come into effect from 1st April 2019 onwards.