Budget 2018: With Union Budget 2018 round the corner, there are expectations from the Modi government to introduce tax-advantaged retirement plans that have the potential to encourage people to save more for retirement. Planning for retirement is essential to maintain the lifestyle after all those years of hard work. With the rise in life expectancy and standard of living, it is imperative to design a robust pension system to avoid social distress. Finance Minister Arun Jaitley will present the Modi government’s fifth Union Budget on February 1 in Parliament. The last full budget before the Lok Sabha 2019 will be crucial. People will expect crucial income tax related announcements from FM Jaitley in Budget India 2018. Herein, we have outlined few retirement schemes that are prevalent in certain countries.
Defined contribution plan – 401(k)
A 401(k) plan is an employer-sponsored savings plan that allows employees to contribute their pre-tax earnings, while the employer pays the matching contribution as per the limit specified by the US federal government. While the contributions are tax deductible, accumulation withdrawn is taxable at the special rate.
Individual Retirement Account (IRA)
Any individual can contribute to IRA and it is not employment specific. The contributions so made are allowed as tax deduction depending upon the earnings of an individual and his coverage by any other retirement plans such as 401(k). However, the amount withdrawn is considered as taxable.
Health Savings Account (HSA)
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Individuals are allowed to contribute to this account as per the specified limit and can claim deduction from income tax. Funds are allowed to be withdrawn to cover qualified medical expenses at any time without tax liability or penalty. The scheme also provides for withdrawal of funds for any other reason upon payment of taxes and penalty.
National Insurance (NI)
National Insurance Contributions (NICs) are paid by both employee and employer on earnings through the Pay As You Earn (PAYE) system to qualify for certain benefits and state pension. Weekly income benefits and some lump-sum benefits are provided to participants upon death, retirement, unemployment, maternity and disability. The contributions made are tax-free but the withdrawal is allowed on payment of taxes.
Social Security Program – Age Pension
This is a mandatory retirement saving system which warrants to put away 9% of their salaries every year into a private/public 401(k) called superannuation account. In order to receive age pension, an individual must be at least 65 years of age, meet an income and assets test and should have been an Australian resident for at least 10 years. There is no tax liability on receipt of the age pension.
The current tax provisions allow a capped deduction of INR 1,50,000 under Chapter VI-A of the Income tax Act in respect of contribution/payment towards Provident Fund, Public Provident Fund, bank deposits, Life insurance plans etc. An additional deduction of INR 50,000 is permissible for contributions to National Pension Scheme (NPS). It is expected that the threshold is either increased to INR 2,50,000 (or) exclusive deduction is allowed for retirement contributions. Presently such contributions are covered within the limits specified above.
Presently the retirement benefits can be classified under the EET (Exempt-Exempt- Tax) tax regime which means exemption both at the time of contribution and continuation of investment, but taxable at the time of withdrawal. For a robust retirement plan, the government could consider switching the taxation regime from EET to EEE (Exempt-Exempt-Exempt) that provides tax exemption on maturity as well.
Sudhakar Sethuraman is Partner, Deloitte India, Rohit Rastogi is Deputy Manager, Deloitte Haskins and Sells LLP