‘Tax Par­ity will Make a Lot More EPF Sub­scribers to Switch to NPS’

The Economic Times - - Economy: Macro, Micro & More -

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.

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