In India we do not have a comprehensive social security regime that takes care of the financial requirements of an individual in case of any emergency during his or her working life and also after retirement. Therefore, individuals are left to themselves to save and accumulate funds to meet their long-term financial requirements, which is an important reason for the increased psychological stress for the people in our country.
The Employees Provident Fund Scheme (EPF) introduced in 1952 has helped, albeit in a limited manner, as only a very small part of the country’s population is covered under the EPF Scheme. Against this background, the New Pension Scheme (NPS) introduced by the government, initially for government employees and now open for every individual, is an attempt to bridge the gap towards meeting long-term savings requirement.
NPS is primarily a defined contribution scheme wherein the funds would be accumulated, invested in specified investments and where the individual would have an option to withdraw funds and/or buy annuity policies to receive regular pension as specified. Under NPS, two kinds of schemes have been proposed, popularly known as tier-1, which is non-withdrawable up to specified age vis-?-vis tier-2, where there is freedom to withdraw.
The investments from NPS will be made in a combination of equity, government securities and corporate bonds. One of the important features of NPS is that it will be supervised by an independent regulator ? the Pension Fund Regulatory and Development Authority (PFRDA), which has laid out broad parameters/structure of the scheme and the investment pattern. In a nutshell, NPS could be a game changer in the long-term once it receives the necessary push from the government and the regulator. Also the points-of-presence should come forward to popularise it and market this financial instrument in the right spirit.
It is pertinent to note that a deduction could be claimed by an employee for contributions made by him not exceeding 10% of the salary subject to an overall limit of R1 lakh in a financial year. Further, the contribution made by the employer not exceeding 10% of the salary, without any overall limit, would also not be taxable in the hands of the employee. Correspondingly, the employer also enjoys corporate tax deduction for the contribution made by it. Thus, it offers a good tax planning and savings avenue for meeting long-term retirement and other needs.
Even though the withdrawals from NPS are currently taxable, under the proposed Direct Taxes Code, the NPS is proposed to be covered under the exempt-exempt-exempt regime wherein the employee would enjoy the tax benefits when contributions are made, the accumulations in the fund would continue to be tax-free and withdrawals may also be exempt, subject to conditions.
*The writer is executive director,
KPMG
