The Pension Fund Regulatory and Development Authority (PFRDA) has sought full tax exemption for withdrawal of corpus post-maturity under the National Pension Scheme (NPS) in the upcoming Union Budget.
“The NPS needs to be made more attractive and there is huge scope [for the same], especially when the job market is uncertain. To widen its reach, the NPS should be treated on a par with other retirement savings schemes like the Public Provident Fund and the Employee Provident Fund, which enjoy EEE (Exempt-Exempt-Exempt) status,” Hemant Contractor, chairman, PFRDA, told The Hindu in an interview.
Under the EEE category of the tax structure, all three stages of an investment life cycle — investment, accumulation and withdrawal — are tax-exempt. This feature is now available for the Employee Provident Fund and the Public Provident Fund.
However, the NPS comes under the EET, or “Exempt, Exempt, Taxable” category, where investments and accumulation are tax-free, but there is a partial tax on withdrawal, which makes the scheme unattractive.
Post-retirement, a subscriber is allowed to withdraw 60% of the accumulated corpus as lump sum and it is mandatory to invest the remaining 40% in an annuity scheme, which would give him/her a regular pension. Of the 60% limit, up to 40% is tax-free and the remaining 20% is taxed. Also, income earned from annuity is taxed.
Mr. Contractor said that if the long-pending demand for full tax exemption is granted, it would be a big boost for the sector and would help improve penetration.
Key challenge
He noted that one of the biggest challenges for the NPS is creating awareness, adding that people don’t think about retirement planning.
“An RBI study among households last year showed that people don’t think about a retirement plan which would provide regular income. One of the key things would be to bring [about] a change in mindset,” Mr. Contractor said.
When asked about the prevailing job uncertainty and muted growth in salary levels, he said the NPS was suited for such conditions.
“The NPS is tailor-made for uncertain job situations and ensuring security despite that. You can enter the scheme with a minimum investment of ₹1,000. You can miss out for two years and then come back to the scheme,” Mr. Contractor explained.
