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In a major relief to the pensioners, the central government has decided to announce the complete tax exemption to the 60% of the corpus of the National Pension Scheme (NPS) during the time of withdrawal at maturity.

As per the income tax rules, at the time retirement, an investor is bound to use 40% of the corpus to buy an annuity and can withdraw the remaining 60% of the corpus. It is to be noted that till last week the only 40 percent of the amount was exempted from tax while the remaining 20 was taxed. The Union Cabinet approved a proposal to increase the tax exemption limit to 60% last week.

Hailing the announcement made by the center, Hemant Contractor, chairman of the Pension Fund Regulatory and Development Authority (PFRDA) said that "This is a very positive step and brings NPS at par with other retirement products. It will make the NPS more attractive and have a far reaching impact on the pension sector in India."

Pension funds across country have given their thumbs up on the development. "Now that 60% of the corpus will be tax-free on maturity, NPS will now be comparable with the Public Provident Fund and Employee Provident Fund and better than any other financial savings product," said Sumit Shukla, CEO of the HDFC Pension Fund.

He further went on to add that "Earlier, 20% of the corpus was taxable at maturity. That included the principal as well as the gain. Now, no part of the principal will get taxed on withdrawal."

The Economic Times reported that in another huge change, the mandatory contribution by the Central Government for employees that are covered under NPS has also been increased from the existing rate of 10% of salary to 14%.

"The hike in the government's contribution will make NPS better than the defined pension under the old system where the pensioner got 50% of his last drawn salary," claimed Shukla