The acceptability of the National Pension System is growing fast with the government relaxing norms for withdrawal and investment in the last few years, but to make it reach the required level, its tax treatment must be made similar to the EPF.
The National Pension System (NPS) is finally emerging as an alternative to the Employees Provident Fund (EPF) for many, and an additional saving window for even those sticking to the EPF – thanks to the tax breaks announced in the last two budgets and rise in the equity markets and reduced interest in the traditional investment options like gold and real estate that has also ensured good inflow in mutual funds and pension instruments.
The NPS corpus grew by 47% to Rs 1.72 lakh crore, and the subscriber base also rose by 25% in the last financial year to touch 1.57 crore. Considering the EPF, preferred option for years, has a subscriber (active) base of about 4.1 crore and a corpus of more than Rs 7 lakh crore, this is certainly a turnaround in the acceptance level of the NPS.
While it is true that the government push to curb black money and diminishing returns in the fixed deposits and other small savings instruments, is forcing people to look at the safer and better options of mutual funds and NPS, in case of the latter, the growth has more to do with the way government has started promoting it as an option to the EPF.
The disadvantage of getting taxed at the withdrawal level (EET) that NPS had till 2016 over the EPF money, which is tax exempt at all stages (EEE), got reduced to a certain level when the government decided to make 40% of the NPS withdrawals tax exempt at maturity. On top of it, in 2017, the government also allowed tax exemption on partial withdrawals below 25% of the contribution.
Along with the 16% investment in equity that NPS has, and an annual Rs 50,000 tax exemption (introduced in FY16) on contributions, it is fast catching up with the EPF, that invests 5% of its corpus in equity though the plan is to take it to 15%, and has given 8.65% interest in FY17.
This certainly is making NPS, which is mandatory for the government sector employees, attractive also for the private sector companies and individual employees – PFRDA Chairman Hemant Contractor has told Indian Express that 1,000 corporates signed up in FY17, which has taken the total number to 3,800.
But, if the government is serious about turning NPS into an effective alternative, the binding of mandatory 40% maturity amount to be invested in an annuity, which gives a return of just 5-6% annually, and though is tax exempt at the time of withdrawal, its returns will be taxed, will have to be removed.
Even taxing the balance 20% amount at the time of maturity doesn’t make sense when 100% of the EPF amount, are non-taxable. With the flexibility that NPS provides to its members in terms of investments and the transparency associated with the returns and charges (EPF is considered world’s most expensive mutual fund), the NPS has the potential of becoming a better managed retirement option than the EPF if the tax treatment and ease of withdrawal is the same for both.
Finance minister Arun Jaitley will do well by addressing this issue through the required tax changes and option like systematic investment plan (SIP) in place of an annuity, in the next budget if he is serious about bringing more employees to the NPS and also forcing the required changes in the running of the EPF.