Improvement in healthcare, awareness about healthy habits and preventive medical interventions have pushed India to the threshold of an era when long-term care of the elderly is going to be a major socioeconomic challenge. Currently, India has about 80 million elderly people and this number is poised to grow so fast that by 2047 they alone will be equal to divided India’s population in 1947.
The emergence of such a massive non-earning and dependent population may pose serious threat to the nation’s ability to keep pace with global growth rate. The present government is gung-ho about the nation’s might waiting to be unlocked in about 600 million youth. But there is a risk of the government’s strategies getting derailed.
In his Budget speech in 2016, the finance minister had stressed the need to create a pensioned society and for encouraging adoption of annuity as a regular source of income after retirement. He had proposed income tax relief on that portion of the Provident Fund proceeds which could be used for buying annuity. To discourage lumpsum withdrawal of entire PF corpus for purpose other than for old age, he had proposed tax on certain amount of the PF. His step was visionary but could not elicit popular support. This year he will hopefully lend policy support to create a pool of fund for ensuring regular income to senior citizens to live with dignity.
In India, retirement solutions are available to the fortunate few. In view of the magnitude of the problem of supporting the elderly through regular income, more innovative ways are to be found. The Income Tax Act must encourage systematic building up of retirement corpus during working life, so that regular income through annuity can guarantee decent living to the people in their silver years.
The existing tax law supports accumulation of funds through Section 80C and Section 80CCD. The NPS and the Atal Pension Yojana are wonderful mechanisms to provide regular income to people after retirement. But the existing provision for tax on annuity income secured through insurance companies is a major disincentive.
The annuitants feel discouraged by reduction in monthly income due to taxes up to 33%. In some states in the US, tax laws provide for lower tax rates on annuity as the tax liability is calculated on the basis of ratio of interest income of the fund in the annuity instalment. In annuity, there is systematic withdrawal of the principal on the basis of assumed life expectancy. Hence, on the portion of principal, tax is not levied. But this is applicable to life annuity plans, the plan wherein the purchase price or the corpus gets extinguished with the death of the annuitant and there is no provision for return of purchase price.
To make NPS successful, employers should be encouraged to contribute a certain amount and such contributions may be supported by substantial relief in corporate tax. The Budget can provide for a matching contribution from the government’s social security fund to the people in the unorganised sector if they opt for life annuity by using the NPS corpus for themselves or their spouse.
The writer is former MD & CEO, Star Union Dai-ichi Life Insurance