In Budget 2016, the Government introduced tax proposals to further its objective of creating a robust pensioned society. The Government attempted to bring parity in the tax treatment of retirement schemes such as the Employee Provident Fund (EPF), Approved Superannuation Fund (ASF) and National Pension Scheme (NPS) to encourage contributions to NPS.

This had also been recommended by the Pension Fund Regulatory and Development Authority (PFRDA) in 2015. The NPS was earlier under the Exempt Exempt Tax (EET) regime and hence compared unfavourably with other long-term saving schemes. While a few of the Budget proposals relating to PF and ASF were subsequently withdrawn, tax benefits introduced towards NPS were retained. Let us understand how NPS compares with a few of these schemes today, in terms of their tax treatment:

EPF: The employer contributes up to 12 per cent of the specified salary and interest thereon is exempt from tax at the time of accrual of contributions. Employee’s contribution is eligible for deduction from taxable income within the overall basket of Section 80C of the Income-tax Act. Withdrawals are fully exempt from tax in case the employee has rendered continuous service for a period of five years.

ASF: Under ASF, the employer contributes up to ₹150,000 per annum (limit revised from ₹100,000 by Finance Act, 2016) is not included in employee’s taxable income.

Employee’s contribution is eligible for deduction under Section 80C, within the overall gamut. Lump sum withdrawal on retirement is non-taxable, while the periodic annuity thereafter is taxable.

Other pension schemes

In few other notified pension schemes also, individual contribution is eligible for deduction under Section 80CCC, within the cap of ₹150,000 per annum. Further, commuted pension is allowed certain tax exemptions at the time of retirement.

Other long-term saving instruments: A few other long-term saving instruments in the market (for instance, equity based mutual funds, LIC, Public Provident Fund, etc.) also enjoy EEE tax treatment i.e. the initial investment, the accrual of income and the withdrawal subject to conditions.

NPS: Its taxability has evolved over a period of time. Employer’s contribution up to 10 per cent of defined salary is not taxable. Employee/ individual contribution up to 10 per cent of defined salary/ gross total income respectively, is eligible for deduction, subject to a maximum of ₹150,000 per annum within Section 80CCE. Thereafter, from 2015-16 onwards, an extra deduction of ₹50,000 per year towards employee contributions was made available for NPS. Also, Finance Act 2016 brought a much awaited amendment and made the amount received on exit/ closure from NPS, tax free up to 40 per cent, partially aligning its exit tax treatment with other products. The periodic annuity continues to be taxable.

But considering that in the other retiral schemes the entire lumpsum withdrawal may still be tax free vis-à-vis NPS, Budget 2017 may look to fully exempt withdrawals from NPS. Further, the additional deduction of ₹50,000 per annum may be increased to ₹150,000 per annum to induce further investment into NPS. Also, encourage people to subscribe to annuities, the government may consider a tax exemption for annuity income.

The writer is Partner–Global Mobility Services, Tax, KPMG in India. The views are personal

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