New Delhi: The Union government might consider providing tax benefits to people putting money in the New Pension Scheme (NPS), bringing it on a par with older pension programmes.
“I have asked for it and expect it to come through,” said D. Swarup, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), referring to the pension regulator’s budget wish list.
The new United Progressive Alliance government expects to present the budget in the first week of July.
Officials preparing the budget are inaccessible till it is presented in Parliament to ensure secrecy.
PFRDA extended the scope of NPS to all citizens on 1 May. Contributions are voluntary and open even to people who are unemployed or self-employed. Earlier, NPS was restricted to employees of Union and state governments.
The government would have to amend section 80CCD of the Income-tax Act, 1961, to allow for taxation benefits to NPS investors.
Section 80CCD allows an employee to deduct from the total income a deposit in a pension account, subject to a ceiling of 10% of the salary. Therefore, tax is levied on a lower level of income. Being a salaried employee is essential to qualify for tax benefits.
“Tax benefit under section 80CCD gets cut short to an individual employed. If you are self-employed, you are not eligible,” said Vikas Vasal, executive director at consultancy firm KPMG.
This affects part of the client base of NPS and also the marketability of the scheme.
NPS is part of the previous UPA government’s attempt to create a social securitysystem that can be accessed by all citizens. An attempt to introduce legislation to empower PFRDA failed due to opposition from the Communist parties.
The current Lok Sabha is expected to debate a new pension Bill that would give PFRDA teeth and remove weaknesses in NPS.
There are other taxation issues with NPS as well. Unlike competing social security schemes such as the one run by state-owned Employees Provident Fund Organisation, or schemes offered by life insurers, when an NPS client withdraws accumulated savings, it would be taxed.
These schemes, all of which are long-term in nature, enjoy a tax regime described as EEE (exempt, exempt, exempt). When a client makes an annual investment, he qualifies for a tax exemption.
The investment returns on the contribution are also exempt from tax. Finally, the accumulated savings is exempt from tax in the hands of the client. NPS savings, on the contrary, are taxed at the last stage. PFRDA has sought parity with competing schemes in the last stage. “I have also urged the government to give an EEE benefit,” Swarup said.
The uneven tax treatment to NPS is a factor that has contributed to a slow growth in the scheme in the last month, Swarup said, without giving details such as the number of pension fund accounts.