By Mr. Manoj Nagpal, Outlook
Asia Capital
The National
Pension System (NPS) has been vigorously discussed in the media ever since the
Budget 2105-16 proposed income tax
benefits.
NPS allows withdrawals of up to 60% of the
accumulated corpus at or / after the age of 60.
Some say there
is a possibility of withdrawals being eligible for indexation benefits.
Others suggest
rules on tax treatment of NPS are ambiguous & clarity is required. Nothing
can be farther from the truth.
The income tax
treatment has been unequivocally defined in the various union budgets in the
past few years. One might only argue that NPS tax treatment is unfair.
The dominant
retirement products in India, the EPF (Employees Providend Fund) and PPF
(Public Providend Fund), offer income tax exemption at all three stages:
contribution, growth & withdrawals.
When the NPS was
designed, the direction was clearly to migrate to the EET regime where
contribution & growth are income tax free but withdrawals are taxable. It
was made clear in the 2004 Budget presented by Finance Minister Mr. P
Chidambaram that the scheme would follow EET taxation. The Budget memorandum
clarified that the entire amount in the NPS account will be treated as normal
income for the individual in the year of withdrawal either as lump sum or / as
pension through annuity.
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| Mr. Manoj Nagpal, Outlook Asia Capital |
Since all withdrawals were said to be treated
as normal income, there is no question on indexation benefits being applicable.
Later budgets
further clarified this by amending Section 80CCD, excluding the amount of
corpus used to purchase the annuity from the tax ambit & including the
words “whole or part“ as being taxable when received by the individual.
Thus, right from
the beginning it has been clear that NPS withdrawals will be treated as income
with marginal tax rate applicable on the entire withdrawals.
One key aspect
about the taxation of NPS needs particular attention.
For government
employees who contribute to the NPS, the commutation withdrawals are exempt
from tax.
For other
investors whose employers offer the NPS, withdrawals from the scheme enjoy some
tax exemptions under Section 10(10A). If an individual does not receive
gratuity, up to 50% of the total corpus received as commuted pension will be
tax free.
If gratuity has been paid, only 33% of the
corpus is oncome tax free.
Let us look at
the income tax implications for an individual who has a corpus of Rs. 2 crore
when he retires. Of this, 40% (or Rs. 80 lakh) will go into buying an
annuity. Assuming that he does not
receive gratuity , 50% of the corpus (or Rs. 1 crore) will be tax free. So, he
will be taxed only for Rs. 20 lakh.If he has received gratuity, only Rs. 66
lakh will be tax free & he/she will be taxed for Rs. 54 lakh.
The income tax
exemption under Section 10(10A) is positive. But, the tax treatment is
discriminatory. Private sector employees do not get the same tax benefits as
government staff.
The commuted
corpus has tax exemptions only for NPS offered by an employer. Under current
rules, an individual who does not have a corporate NPS account but invests in
the NPS directly is not eligible for the income tax exemption under Section
10(10A). This makes the NPS taxation unfair to the self-employed.
For a scheme that
was primarily envisaged to bring the self - employed into the pension fold, NPS
needs to offer uniform income tax treatment to all participants.
For this, the
NPS should be brought under Clause 23(aab) and the income tax treatment should
be made the same for all.
If this anomaly
in the taxation of NPS is rectified and the income tax benefits under Section
10(10A) are evenly offered to all, NPS will become the most preferred vehicle
for retirement planning.
About the author
The author Mr.
Manoj Nagpal is CEO, Outlook Asia Capital, a consulting and wealth management
firm.
Contact
Mr. Manoj Nagpal, MD & CEO
Outlook Asia Capital
E : M. Nagpal@Outlook.com
Cell : +91 - 98202 - 93966
http://www.outlookasiacapital.in/
Note: Views
expressed above are the author's own.
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