With the additional income tax deduction of Rs 50,000 announced in 2015-16 Budget failing to enthuse private-sector workers to embrace the national pension system (NPS), the government may make it more attractive in the coming Budget by making it tax-free at all three stages: Contribution, accumulation and withdrawal.
The move would make tax treatment of NPS at par with public provident fund (PPF) and employee provident fund (EPF), which enjoy the exempt-exempt-exempt regime. Currently, NPS falls under the exempt-exempt-tax (EET) regime.
As per the rules, an NPS account holder will have to make a compulsory purchase of an annuity with at least 40% of the corpus amount after maturity at the age of 60-plus. The corpus will be the total of her contributions over the years plus the returns earned from equity, corporate debt and government debt. On this 40%, there is no tax at the time of maturity.
However, the income from annuity will be taxed at the individual’s tax-slab rate.
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In the last Budget, finance minister Arun Jaitley made withdrawals from NPS on maturity tax free up to 40% of the total corpus accumulated. So, effectively an individual has to pay tax on 20% of the maturity corpus now.
With only 12% of the country’s workforce covered by any kind of old age security, the government feels that a huge push is required to expand the NPS coverage in the country. That the NPS, started in 2004, is still to make major inroads into the private sector is evident from the fact that 87% of the Rs 1.59 lakh crore asset managed under NPS belonged to government employees, for whom joining the scheme is mandatory.
Confirming that the government was contemplating a further boost to NPS, an official said: “The major demand is to extend EEE tax status to NPS. We are seriously considering this.” He, however, added that another option was to make 80% of corpus tax-free at maturity, while 20% is invested in an annuity product.
Removing the tax disadvantage will also spur subscribers to switch from EPF to NPS and vice versa. “Why will people switch from EPF to NPS and pay tax at the time of withdrawal under the current regime,” said Gaurav Karnik, tax partner, EY India. Mandatory use of 40% corpus to buy annuity products was also seen as another disadvantage. Annuity products give 6-7% return, which is also taxable. NPS’ annualised return is about 10% while EPF would pay 8.65% interest in FY17.
The Pension Fund Regulatory and Development Authority and other stakeholders have made representations to the government to change the mandatory annuity investment requirement. It could be replaced with alternatives such as staggered withdrawals of corpus after maturity, the sources added.