In Budget 2021, tax specialists expect the government to fix some irregularities in the NPS with regard to income tax gains. They say that this will help in improving the attractiveness of the National Pension Scheme.
“Contribution for Tier I account up to 14% of the employer’s participation is permitted for central government staff however once it comes right down to different staff most of up to 10% of the participants from the employer is suitable for deduction under Section 80CCD(2). The government should include amendments to take care of these irregularities to make the scheme just and fair for each category of subscribers,” said Balwant Jain, an investment and tax expert.
Under the current income tax laws, if an employer is committing towards the employee’s NPS account, a deduction up to a definite percentage of salary (basic + DA) irrespective of any limit suits for income tax deduction under Section 80 CCD(2). For central government employees, it is 14% of salary and for others is 10%.
There is also an expectation to raise the quantum of exclusion for employer contribution from 10% of salary to 14% on the lines of what is being given to government employees, says Saraswathi Kasturirangan, partner at Deloitte.
There are many other irregularities in the NPS scheme which the government should work on in the budget to be introduced on 1st February, said Balwant Jain.
“The government needs to quickly bring certainty about taxation of withdrawals from the Tier II account of NPS so that the subscriber is not ignored at the discretion of the assessing officer. The withdrawals from Tier I are tax-free and the balance of 40% has to be used to purchasing an annuity. But there are no terms about how the withdrawals from Tier II accounts should be taxed since these are not the mutual fund products for which there are exact rules. Absolute clarity will go a long way in clearing the clouds around tier-II account taxation,” he said.
“For participation towards tier II account only the Central Government employees are authorized to claim reduction under Section 80 C with a lock-in period of 3 years. A similar option is not available to other subscribers,” he added.
Currently, a central government employee’s participation towards the Tier-II account of NPS for availing income tax deduction (up to ₹1.5 lakh) per year will have a lock-in period of 3 years.
“All the suited subscribers should be permitted the benefit of tax gain towards Tier II account essentially when this gives a slightly risky option where subscriber can opt for a debt part of 100% making it less risky as matched to other product available of the same time tenure i.e. ELSS or Equity Linked Savings Schemes,” he said.
Mr. Jain also says that the government should bring in parity between the tax treatment of employee provident fund and NPS at the time of maturity. “The maturity process of EPF is fully tax-free and the subscriber is free to invest the money the way he wants. However, the NPS subscriber can only withdraw up to 60% of the collected balance in his NPS account at the period of retirement and for the balance, he has to mandatorily buy an annuity from any life insurance firm registered with IRDA,” he added.