Giving a big boost to the pension sector, the Budget has rationalised the tax treatment of recognised provident funds (PFs) and national pension system (NPS), bringing parity in tax treatment of different types of pension plans.

The Finance Minister announced that withdrawals up to 40 per cent of the corpus at the time of retirement would be tax exempt in the case of NPS.

This is significant, as currently the entire NPS corpus at the time of retirement is subjected to tax in one way or the other. As much as 40 per cent of the corpus has to mandatorily go to purchase of annuities and the sum received as annuity is entirely taxed at the hands of taxpayer. The remaining 60 per cent is also subjected to tax.

With the Budget announcement, there is some tax relief for NPS subscribers, which is expected to boost demand for this product, Hemant Contractor, Chairman, Pension Fund Regulatory and Development Authority, told BusinessLine.

“The proposal meets our expectations. We had sought complete tax exemption at withdrawal stage or at least align our tax treatment with that of provident and other superannuation funds. The latter has happened. So now we are at par with PFs and this is what we wanted,” Contractor said.

New PF tax regime

For contributions made by employees to a recognised PF after April 1, 2016, the Budget provides that as much as 40 per cent of the accumulated balance would be exempt from tax at the time of withdrawal/retirement. The balance 60 per cent of the accumulated balance would be subjected to tax at the time of withdrawal.

This would be a departure from the current tax regime for recognised provident and superannuation funds that are accorded exempt-exempt-exempt (EEE) status (contribution—accumulation-withdrawal).

This new tax treatment will apply only for employee contributions after April 1, 2016. All contributions made prior to this date are likely to be guided by EEE tax regime, which means accumulations withdrawal would be tax exempt.

Service tax

Jaitley also announced that annuity services provided by NPS and services provided by the Employees Provident Fund Organisation will be exempt from service tax.

He also proposed to reduce service tax on single premium annuity (insurance) policies from 3.5 per cent to 1.4 per cent of the premium paid in certain cases.

Other benefits

Jaitley also announced that the annuity fund that goes to the legal heir after the death of pensioner will not be taxable in all the three cases of NPS, recognised PFs and superannuation funds.

The Budget has also proposed a monetary limit for contribution of employer in a recognised provident and superannuation fund of ₹1.5 lakh/ year for taking tax benefit.

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