NPS not on par with EPF, PPF despite changes
The cabinet made certain important amendment to National Pension System (NPS) on December 6, 2018. There is confusion galore in the minds of taxpayers about the implications and applicability of the decisions. Let us discuss.
Increased central government’s contribution to NPS
Presently the Central Government contributes 10% of salary to NPS account of its employees. The cabinet has decided to increase this to 14% of salary. There is no change in employees’ contribution. So, employees will be able to accumulate a substantially higher contribution at the time of their exit from the scheme without having to contribute a single penny additionally to their NPS account.
With increased life expectancy without corresponding enhancement of retirement age, the salaried have to fend for themselves for longer period of retirement with the same working period for accumulation of the retirement kitty. This decision will help central government employees to have higher corpus which is useful given that people are living longer and costs of living have increased. This change will certainly trigger demand for change in the contribution by state governments in due course.
Presently an employee can claim deduction in respect of contribution made by employer under Section 80 CCD(2) of the Income Tax Act, up to 10% of the salary as employers’ contribution is included in the salary of the employee. So though the central government may start contributing higher sum to employees’ NPS accounts, tax benefit for the same would still be restricted to 10% until the Income Tax Act is amended. This is bound to happen in all probability, with retrospective amendment to allow the benefit of increased contribution.
Moreover, since there is no absolute monetary limit for tax benefit on contributions made by employers to your NPS account, as long as it does not exceed 10% of the salary, central government employees will not be liable to pay any tax on the increased contribution after the amendment.
Choice to select pension funds, pattern of investment
The cabinet decision has also proposed to let central government employees choose their pension fund and the composition of investment in equity, debt and government securities, which hitherto was not available to them. This will be beneficial for subscribers as they will have wider choice in terms of fund house as well as the choice of the composition between the three asset categories.
Benefit for contribution toward tier II account
A person opening an NPS account has to open an NPS Tier-I account and has the option to open Tier-II account as well. Presently tax benefits are available for contributions made to Tier-I account only and not for contribution made towards Tier-II account. The cabinet has proposed to extend the tax benefit for contribution toward tier II account under Section 80C. The only condition for availing this benefit is that the contribution will have a lock in period of three years. Equity Linked Saving Scheme (ELSS) is the only other product with similar tenure. Allowing the same tax benefit to contributions to Tier-II NPS account means the subscriber would be investing in a debt product which is not as risky as ELSS. The other debt product that offers tax benefit is tax-saving fixed deposit, but it has a lock-in five years.
This change will also need amendment in the I-T Act to take effect. This amendment will also be made for all subscribers in all likelihood.
Enhancement of exemption limit for withdrawals at retirement
Currently, a subscriber has to buy an annuity for minimum of 40% of the corpus accumulated at the time of exit. Of the remaining 60%, 40% can be withdrawn as tax exempt. For the balance 20% the tax payer has an option to withdraw it and pay tax thereon or buy an annuity for it and defer the tax. The cabinet has proposed to enhance the exempt withdrawal from present 40% to 60%. And thus making 20% additional withdrawal tax-free in the hands of the employees.
This change is claimed as one which brings NPS on parity with Employee Provident Fund (EPF) and Public Provident Fund (PPF). In actual practice this is not so. For PPF and EPF your 100% corpus is tax exempt as you do not have to invest in the low yield product like annuity. The government should either make buying of annuity mandatory for EPF subscribers at the time or retirement or make the requirement to buy an annuity with 40% of the corpus optional for NPS subscribers to make these products truly comparable.
To whom do these decisions apply
For now, the proposed changes will not apply to employees of government companies like Life Insurance corporation of India, Food Corporation of India, Public Sector Companies, state government as well as local authorities like municipal corporations. Even the tax benefits of higher exemption and tax rebates for Tier-II accounts will not apply to private sector and self-employed employees unless the I-T Act is amended. In my opinion the tax laws will be amended in such a way as to extend these benefits to all the subscribers.
Source : dnaindia.com