‘Tax Parity will Make a Lot More EPF Subscribers to Switch to NPS’
Pension Fund Regulatory and Development Authority (PFRDA) chairman Hemant Contractor believes that tax parity in retirement products is critical if India is to be a pensioned society. He says if the New Pension System (NPS) gets the same tax treatment as the EPF, a lot of EPF subscribers would want to shift to the pension scheme. In an interview to Babar Zaidi, Contractor also says that NPS investors should have the choice to look beyond annuities and invest their maturity corpus in products that offer higher returns. Edited excerpts:
The NPS has witnessed a surge in investor interest in the past year. How far is this due to the tax changes announced in the past two budgets? The additional tax deduction under Sec 80CCD(1b) announced last year and this year’s proposal to make 40% of the corpus tax free on maturity have certainly made NPS more attractive. But simplifying the procedure to open an NPS account and invest in the scheme has also helped get investors on board. Roughly 1.2 lakh new NPS accounts were opened in 2015-16. Out of these, 31,000 are eNPS accounts that were opened online. Investors want convenience and the eNPS online facility provides just that.
The changes have made NPS more attractive, but other retirement products such as EPF and PPF enjoy better tax treatment. Do you believe NPS should be given more tax benefits? The EPF and PPF corpus is completely tax free, while this year’s budget has proposed to make 40% of the NPS corpus tax free. Another 40% escapes immediate taxation because it is put in an annuity. But the balance 20%, if not annuitised, is taxed. We believe that there should be parity, a level playing field for all retirement products.
An amendment that allows EPFO subscribers to switch their retirement corpus to the NPS has
been framed. When do you think it will see light of day? For it to be successful, there should be parity in the tax treatment. Why would anybody want to shift his money from the fully tax-free EPF to the NPS where only 40% of the corpus will escape tax. Once there is parity, a lot of EPF subscribers may want to switch to NPS.
A major drawback of the NPS is that 40% of the corpus is to be compulsorily invested in annuities that offer very low rates. We want that NPS investors should have the choice to deploy their maturity corpus in instruments other than annuities. They should be allowed to choose between annuities, which cover longevity risk but offer low returns, and other instruments which offer higher returns but do not cover longevity risk.
A sore point for investors is that the monthly pension from annuity is fully taxable. Doesn’t this amount to double taxation? There have been several representations to the government from various quarters seeking tax exemption for annuity income. As I mentioned before, there should be parity in the way pension products are taxed.
By that logic, shouldn’t pension products from insurers and mutual funds be eligible for the additional .₹ 50,000 deduction under Sec 80CCD(1b)? Right now, this benefit is exclusively for NPS. We don’t want insurers and mutual funds to sell pension products unless they are regulated by PFRDA. In fact, many of these products are not even retirement schemes. They may have the terms ‘pension’ and ‘retirement’ in their names but they are not really pension products. The tier II account of the NPS was meant to be a lowcost mutual fund. But the tax treatment makes it very unattractive because the entire withdrawal is taxed. This is an anomaly which will hopefully be rectified soon. Instead of the entire amount, only the gains should be taxed. Also, investors should ideally get indexation benefits as well if they remain invested for over three years.
NPS funds for government investors can invest up to 15% in stocks but pension funds invest barely 8-10%. We also want that government employees should be allowed to choose their pension fund managers and have a higher equity allocation if they want to.