NPS contributions to come under Rs 1-lakh tax rebate

The New Pension Scheme (NPS) for citizens is expected to get a big push with Budget 2009-10 likely to extend tax benefits to contributions to the scheme. The finance ministry is considering a proposal to include pension contributions by private citizens to NPS in the Rs 1-lakh limit for tax-deductible investments under Section 80C of the Income Tax Act, 1961.

Section 80C allows taxpayers to claim tax deductions on contributions made to specified long-term savings products like life insurance, provident funds and savings certificates. Government employees who joined service after January 1, 2004, and are part of NPS, already enjoy this benefit under Section 80 CCD.

Though NPS was opened up to all citizens on May 1, it has found few takers ? primarily for its unfavourable tax treatment vis-?-vis alternative schemes like the public provident fund or the employees provident fund. ?It is a slow start and it is on the expected lines. A lot of people are dissuaded because of the lack of tax benefits,? said D Swarup, chairman of the interim Pension Fund Regulatory & Development Authority.

PFRDA has been asking for a level-playing field for NPS with EPF and PPF, which are exempt from tax at contribution, accumulation and withdrawal, or inclusion in the EEE (exempt-exempt-exempt) tax regime. ?Since NPS is a long-term savings product, it also deserves the EEE benefit,? Swarup said.

While the revenue department in the finance ministry has ruled out such treatment, it is likely to accept the inclusion of citizens? NPS into the basket of products included under Section 80 C, senior ministry officials said.

?Section 80 CCD of the IT Act provides for a tax deduction wherever there is an ?employer-employee? relationship. So, state and central government employees as well as private individuals in employer-employee relationships are eligible for it. But it does not include self-employed individuals, professionals like doctors and lawyers and unorganised sector workers?NPS? key audience,? Swarup told FE .

Swarup confirmed that PFRDA has sought an extension of the Section 80 CCD benefit to such individuals. ?It will be a big boost if it comes through in this Budget,? he said.

?What the government is doing is increasing the basket of products to be included under Section 80 C?s Rs 1-lakh deduction limit. However, since it considers NPS as a more dynamic and potentially high-return product than alternatives like EPF, it isn?t in favour of tax exemption at the withdrawal stage,? said Amitabh Singh, partner at Ernst & Young.