Budget 2016: Pension sector Gets much-needed boost

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Published: March 1, 2016 12:01:47 AM

Budget 2016: FM also takes steps to provide a uniform tax treatment to PF, NPS and superannuation fund

Budget 2016: The national Pension System (NPS) received a much-needed boost in the Budget 2016-17, after the government proposed that 40% of the pension wealth received by an employee from the NPS Trust shall be tax exempt. The Budget, presented by finance minister Arun Jaitley on Monday, also saw steps taken to rationalise the pension sector and to provide a uniform tax treatment to the recognised provident fund, NPS and superannuation fund.

According to market participants, provident fund contributions made from April 1, 2016 will partly follow the exempt-exempt-tax (EET) principle at the time of withdrawal. That is, 60% of the accumulated balance from such contribution shall be taxed and only 40% of such amount will be tax exempt. Currently, 100% of the withdrawal is exempt under the exempt-exempt-exempt (EEE) regime.

The Annexure to Part B of the Budget speech says that, “It is also proposed that the exemption under the recognised provident fund and superannuation fund will be limited to 40% of the accumulated amount arising out of contributions made in such funds on or after April 1, 2016. However, this restriction shall not be applicable to an employee participating in a recognised provident fund and whose monthly salary does not exceed R15,000.”

In the previous Budget, the finance minister had announced an additional income-tax deduction of Rs 50,000 for NPS under Section 80CCD of the Income Tax Act. “40% of the corpus withdrawn from the NPS scheme will be exempt from tax. While the expectation was that the NPS scheme will be brought under the EEE regime in line with the PPF and PF schemes, the partial move toward the EEE regime may help boost the investment in the NPS scheme,” said Homi Mistry, partner, Deloitte Haskins & Sells LLP.

The Budget has also proposed the exemption limit be increased from Rs 1 lakh to Rs 1.5 lakh for annual contribution by an employer to a superannuation fund. Any amount received by the nominee, on the death of the employee at the time of closure of account under NPS referred to in section 80CCD is proposed to be exempt.

G Murlidhar, managing director at Kotak Mahindra Old Mutual Life Insurance, said: “With regard to the insurance industry, we will have to study the specifics; however, there are some small but positive steps like reduction of service tax on single-premium annuity policies, and an increase in the limit for employer’s contribution to superannuation funds.”

To further promote affordable housing, the Budget proposed first home buyers will get an additional deduction of Rs 50,000 on interest for loan up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh.

In order to bring relief to small tax payers and lessen the tax burden on individuals with income not exceeding Rs 5 lakh, the minister proposed to raise the ceiling of tax rebate under section 87A from Rs 2,000 to Rs 5,000. There are 2 crore tax payers in this category who will get a relief of Rs 3,000 in their tax liability.

Rakesh Nangia, managing partner, Nangia & Co said, “To encourage the youth to be self employed, house rent deduction under section 80GG was expected to be revised considering the rentals in metros.”

Key takeaways: 

Govt to impose tax at the time of withdrawal on 60% of the contributions made after April 1, 2016, to EPF and other schemes

Tax deduction limit on house rent allowance increased to R60,000 from R24,000

Exemption limit to be raised from Rs 1 lakh to Rs 1.5 lakh for annual contribution by an employer to a superannuation fund

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