Budget 2020 Expectations for retirement benefits: Like EPF, same tax benefits are also given on mandatory NPS contributions of employees, as well as on employer's contribution.
Budget 2020 Expectations for retirement benefits: For ages private sector employees had Employees’ Provident Fund (EPF) as the only option to accumulate retirement corpus (PF) and to get pension under Employees’ Pension Scheme (EPS) through compulsory deductions from salary and equal contributions from employers.
While the employer’s contribution is tax free up to the statutory limit, employees get tax benefits u/s 80C on their own contribution.
On the other hand, National Pension System (NPS) was introduced initially as New Pension Scheme in 2004 to provide retirement benefits to government employees, who joined their services on or after January 1, 2004.
Like EPF, same tax benefits are also given on mandatory NPS contributions of employees, as well as on employer’s contribution.
From 2009, the door of NPS was opened for general public and private organisations and Public Sector Undertakings (PSUs). Such organisations were also allowed to adopt NPS to provide retirement benefits to employees by replacing EPF.
Apart from the tax benefits on mandatory contribution to NPS u/s 80C, tax benefit up to Rs 50,000 over and above the 80C limit of Rs 1.5 lakh is given u/s 80CCD(1B) to individuals on making voluntary contributions to Tier-1 Account of NPS.
Currently, some Asset Management Companies (AMCs) have Mutual Fund (MF) schemes oriented to provide benefits at the time of retirement. Such schemes have either long lock-in period or long-term exit loads to prevent or discourage people from making premature redemption and investors also enjoy 80C benefits on investments made to such schemes.
Now, the Association of Mutual Funds in India (AMFI), among other things in its wish list for Budget 2020 to Finance Minister Nirmala Sitharaman, has proposed parity for such funds with NPS.
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Among other demands, in its Budget proposals, AMFI has proposed following benefits for Retirement Benefit / Pension Schemes offered by Mutual Funds.
- As in the case of NPS, investment in Retirement Benefit / Pension Schemes offered by Mutual Funds upto Rs 1,50,000 should also be allowed tax deduction under Sec 80CCD (1) of Income Tax Act, 1961 (instead of Sec. 80C), within the overall ceiling of Rs 1.5 lakh under Sec 80 CCE, with E-E-E status.
- Likewise, the additional deduction for investment up to Rs 50,000 under section 80CCD (1B) (presently available to NPS subscribers should be extended to investment in Mutual Fund Retirement Benefit / Pension Schemes, over and above the deduction of Rs 1.5 lakh under section 80C of Income Tax Act,1961.
- Where matching contributions are made by an employer, the total of Employer’s and Employee’s contributions should be taken into account for the purpose of calculating tax benefits under Sec 80 CCD.
- Further, the contributions made by an employer should be allowed as an eligible ‘Business Expense’ under Section 36(1) (iva) of Income Tax Act,1961.
- Likewise, contributions made by the employer to Mutual Funds’ Retirement Benefit / Pension Schemes up to 10 per cent of salary should be deductible in the hands of employee, as in respect of Section 80CCD(2) of the Income Tax Act,
- Withdrawals made by the investor/ employee from Retirement Benefit / Pension Schemes offered by Mutual Funds should be exempt from income tax upto the limits specified for tax- exempt withdrawals from NPS as in section 10(12A) and 10(12B) of the Income Tax Act, 1961.
If accepted, apart from EPF and NPS, private sector employees would get another option to fetch retirement benefits through mandatory contributions, if employers adopt it.