In a bid to make retirement income scheme more attractive for central government employees, the government has agreed to chip in a higher 14 per cent of the basic salary of an individual as its contribution to the National Pension System (NPS), a top source said.
Also, individual contributions, which will continue to be capped at a maximum of 10 per cent of the basic salary, will be exempt from taxable income.
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 lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.
Also, the Cabinet has given more flexibility to the government employees to withdraw the amount from NPS corpus at the time of retirement.
Sources said if an employee decides not to commute any portion of the accumulated fund in NPS at the time of maturity and transfers 100 per cent to annuity scheme, then his pension would be more than 50 per cent of his last drawn pay.
Also, employees will have the option to decide on investing their annuity either in fixed income instruments or equities, sources said.
While the government is yet to decide on the date of notification of the new scheme, sources said many of the changes require an amendment to the Income Tax Act and hence will come into effect from April 1, 2019.
This formula for changes in the NPS was worked out by the Finance Ministry based on the recommendation of a government-appointed committee, sources said.
(With inputs from agencies.)