The union budget will be presented on 1st February so I thought of making some suggestions to remove some anomalies and inequalities in the Income Tax Act provisions to make the NPS system fair and little better for everyone. Here are my suggestions.
Employee Provident Fund (EPF) schemes was introduced for all the employees in the organized sector to help them accumulate funds for retirement. Another system National Pension System (NPS) was introduced in 2004, initially for government employees and then extended for all the Indian citizens. Under the EPF scheme the subscriber gets whole of the accumulated funds to his credit as tax-free at his retirement with full freedom to invest the it the way he wants whereas the NPS subscriber gets only upto 60% of the accumulated balance in his NPS account at the time of retirement as tax free and for the balance 40% he has to mandatorily buy an annuity from any life insurance company registered with IRDA.
In my opinion why should the government dictate the subscribers of one scheme as to where he should invest his retirement corpus and let him get full liberty to use the way he wishes in the other scheme. This becomes important specially looking at the fact that the annuities of insurance companies generally do not give you returns which are able to beat the inflation and moreover it is fully taxable in the hands of the annuitant.
Investments in mutual funds have become safer with evolution of mutual fund as an industry and strict monitoring by the regulator. The government should give the freedom to the NPS subscriber to invest in any product of their choice including a restriction on complete withdrawal of the money so as to ensure that the whole of the corpus is not put to risk. This should apply to subscribers of both the schemes.
The withdrawals from Tier I are tax-free upto 60% and the balance 40% has to be used for buying an annuity. But there is no clear cut provision in the Income Tax Act about how withdrawals from Tier II account should be taxed. Since these are not the mutual fund products, for which there exist exact rules, there is confusion about taxation of Tier II withdrawals. There is no clarify as to whether the same can be treated as equity product and thus entitled to concessional rate of taxes in case the subscriber has opted for 75% or more equity component. Complete clarity will go a long way in clearing the clouds around tier II account taxation. The government should immediately bring in clarity about taxation of withdrawals from Tier II account of NPS. Some expert opine that the full value should be taxed which my opinion is absurd but then clear cut provisions will help us bring in clarify about it.
Presently only the Central Government employees are allowed to claim deduction under Section 80 C for contribution made towards tier II account with a lock in of three years. The same option is not available to other subscribers. Why such a step motherly treatment is given to other subscribers is beyond my comprehension. Is it because the people who draft the tax laws happen to be the central government employee? All the eligible subscribers should be allowed tax benefit for contribution towards Tier II account specially when with Tier II account offers you less risky products as compared with other product of same tenure i.e. ELSS in case the subscriber opts for predominantly debt portion in Tier II account.
Tax benefits for contribution towards tier I account, for employer’s contribution for central government employees, is available upto 14% but when it comes to other employees it is capped at 10% which is eligible for deduction under Section 80CCD(2). This again shows that the scheme is framed to favor central government employee as compared to all the other category of employee. I do not find any apparent reason for this partiality. The government should make employer’s contribution upto 14% tax eligible for all category of the employees.
I feel that the government should introduce amendments to take care of these anomalies to make the scheme just and fair for each category of subscribers.
The writer is a tax and investment expert and can be reached at [email protected] or @jainbalwant his twitter handle.