Retirement savings accumulated under the New Pension Scheme or NPS can now be totally tax-free at the time of withdrawal under certain conditions and the Pension Fund Regulatory and Development Authority (PFRDA) had only urged the government to bring some parity in the tax treatment of different pension products it competes with, such as the employees’ provident fund (EPF), the regulator’s Chairman, Hemant Contractor, told The Hindu on Wednesday.
>The government had introduced a tax on 60 per cent of EPF savings at the time of retirement in the Budget in a bid to make the NPS, savings under which were fully taxable at retirement, more attractive. At the same time, it made 40 per cent of NPS accumulations tax-free. While the EPF tax provision was rolled back last week, the partial tax break for NPS remains.
“Our request was that the NPS should be brought on par with other pension products. That has not exactly happened. Still, this exemption of upto 40 per cent of the retirement corpus is a very big step that the government has taken and it brings us closer to EPF and other pension products,” Mr. Contractor said.
“Hopefully, going forward, we should see some parity between the other schemes,” he said, adding that the new tax exemption of 40 per cent on NPS savings could technically allow its members to get their savings totally tax-free.
“Under the NPS framework, 40 per cent (of corpus) is mandatorily annuitised and that is tax free. Now, 40 per cent of the rest that may be withdrawn as a lump sum is also tax free. So if you annuitise 60 per cent of your balance (instead of 40 per cent), technically, yes, it’s tax-free (entirely),” the PFRDA chairman explained. “If you don’t buy an annuity beyond the mandatory 40 per cent, then 20 per cent of your NPS balance would be taxable,” he added.
“Not everybody wants to put 100 per cent of their savings in annuity. They want to take some lump sum,” Mr Contractor said. An annuity product allows investors to get a steady monthly income on their accumulated corpus. The PFRDA presently allows members to buy such products from five life insurers including LIC of India.
The pension fund regulator, under the administrative control of the Finance Ministry, conceded that the tax treatment of retirement savings has become a ‘tricky thing’, but asserted that it was not pitching for NPS to be made totally tax-free. “We are only saying that it should be comparable with the other pension systems. If that is brought about, then there is no discrimination between the schemes,” Mr. Contractor said.
The NPS which is now also referred to as the National Pension System, has 1.18 crore members, including state and central government employees. It has assets of over Rs.1.15 lakh crore. By contrast, the EPF organization under the Labour Ministry oversees assets over Rs.10 lakh crore.
“We have been growing our subscriber base at about 35 per cent a year and we hope it would pick up further after the Budget measures,” Mr Contractor said.
