By Balwant Jain
Budget 2024: Tax benefits for contribution towards the NPS Tier-I account for employer’s contribution is 14% for central government employees, but capped at 10% for other subscribers. Also, central government employees can claim deduction under Section 80C for contribution made towards NPS Tier-II account, while the same is not available to other subscribers
By Balwant Jain
The Union Budget will be presented this July 2024. Here are some suggestions to remove some anomalies and inequalities in the Income-tax Act, 1961 provisions to make the National Pension System (NPS) fair and little better for everyone.
The Employees’ Provident Fund (EPF) scheme was introduced for all employees in the organised sector to help them accumulate funds for retirement.
Another system, the National Pension System (NPS) was introduced in 2004, initially for government employees, and then extended for all. Under the EPF scheme, the subscriber gets the entirety of the accumulated funds to his/her credit as tax-free at retirement, with full freedom to invest it the way he/she wants to. However, the NPS subscriber gets only up to 60 per cent of the accumulated balance in his/her NPS account as tax-free.
For the balance 40 per cent, one has to mandatorily buy an annuity from a life insurance company registered with the Insurance Regulatory and Development Authority of India (Irdai). The annuity received becomes taxable as and when received, thus effectively making 40 per cent of the corpus in the NPS Tier-I account taxable. The government should give the same treatment to both the retirement products, i.e., EPF and NPS, at the time of maturity.
Why should the government force NPS subscribers to invest their retirement corpus in low-yield products, but give full liberty to those investing in EPF. This becomes important if one specifically looks at the fact that the annuities of insurance companies generally do not give returns that beat post-tax inflation.
Investments in mutual funds have become safer with the evolution of the mutual fund industry, and strict monitoring by the regulator. The government should give freedom to NPS subscribers to invest in any product of their choice with restrictions on withdrawal, so as to ensure that the entire corpus is not put to risk. This should apply to subscribers of both the schemes.
Tax benefits for contribution towards the Tier-I NPS account for employer’s contribution is available up to 14 per cent for central government employees, but when it comes to other employees, it is capped at 10 per cent, which is eligible for deduction under Section 80CCD(2) of the Income-tax Act, 1961. I do not find any apparent reason for this partiality. The government should make employer’s contribution up to 14 per cent tax eligible for all category of employees.
The withdrawals from the NPS Tier-I account are tax-free up to 60 per cent, and the balance 40 per cent has to be used for buying an annuity. But there is no clarity about how withdrawals from the Tier-II account should be taxed. Since these are not mutual fund products, for which there exists exact rules, there is confusion about the taxation of withdrawals from the NPS Tier-II accounts. There are doubts whether the same can be treated as equity products, and thus, would be eligible for concessional rates of taxes in case the subscriber has opted for 75 per cent or more equity component. A complete clarity will go a long way in clearing the clouds around the taxation of NPS Tier-II account. Some experts opine that the full value should be taxed, which is absurd in my opinion, but clear-cut provisions will help bring in clarify about this.
At present, only the central government employees are allowed to claim deduction under Section 80C for contribution made towards Tier-II account with a lock-in period of three years. The same option is not available to other subscribers. Why such a step-motherly treatment is given to other subscribers is beyond my comprehension.
All subscribers should be allowed tax benefit for contribution towards the NPS Tier-II account, especially when the Tier-II account offers less risky products as compared to other product of the same tenure, such as equity-linked savings schemes (ELSS) in case the subscriber opts for predominantly debt portion in Tier-II account.
I feel that the government should introduce amendments to take care of these anomalies to make the scheme just and fair for each category of subscribers.
The author is a tax and investment expert and can be reached at jainbalwant@gmail.com
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