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The Pension Fund Regulatory and Development Authority (PFRDA) Bill 2011 has been passed by Parliament. It’s an important legislation as India has a huge population that needs social security cover.
The basic pension scheme under the PFRDA is the New Pension Scheme, which is also known as the National Pension System (NPS). It is a defined contribution scheme and, currently, there are approximately 53 lakh subscribers with a total corpus of approximately 35,000 crore.
The NPS carries a unique feature wherein subscribers can plan their investments according to their age and risk appetite. A subscriber has the flexibility to make contributions on a systematic basis, that is, monthly, quarterly, or annual. Like any other pension plans, contributions made by the individual would be eligible for a maximum annual deduction of R1 lakh under Section 80CCD, read with Section 80CCE, of the Income-Tax Act, 1961. But what sets it apart from other pension schemes is the tax benefit it offers under Section 80CCD(2) of the I-T Act. Under the I-T Act, contributions made by the employer up to 10% of the basic salary and dearness allowance towards NPS qualify as a deduction in the employee’s hands. The employer is also eligible for a corporate tax deduction on this contribution. Hence, individuals in the higher tax bracket can save significant taxes.
As these changes are beneficial to employees, some employers have started offering NPS as part of the compensation structure. NPS requires compulsorily purchase of an annuity so that you get some money in lump sum and the balance in annuity. Broadly, the lump sum and annuity are both taxable under the IT Act as NPS follows an Exempt-Exempt-Taxable (EET) concept. Under the proposed Direct Taxes Code (DTC), NPS is proposed to be covered under the Exempt-Exempt-Exempt (EEE) regime wherein the employee would enjoy the tax benefits when contributions are made. The accumulations to the fund would continue to be tax-free and withdrawals from the fund are proposed to be exempt.
Schedule 6 of the proposed DTC provides a list of income that will not be included in the total income of an individual. This list includes ‘any payment from New Pension System Trust. Based on this reading, we can say that the lump sum withdrawal and annuity both are exempt from tax. However, it would be difficult to mention anything conclusive till DTC is finally implemented.
As the withdrawals are likely to happen in DTC era for most of the people, NPS can become an attractive investment opportunity. We don’t have many pure pension products, but with these developments, we may see more pension products coming in the future.
The author is a director with KPMG. The views expressed are personal