The New Pension System (NPS),opened for all in May 2009,is set to get a major fillip with Pension Fund Regulatory and Development Authoritys (PFRDA) group offering under the newly introduced NPS Corporate Sector Model to tap employees of all public and private companies in India. While NPS has failed to generate expected interest till now,this may provide it a booster. NPS faces competition from Employees Provident Fund in the organised sector but in the unorganised space it has an unlimited territory to explore.
But even as government has made several attempts to make NPS attractive there are some key challengesliquidity and taxation at withdrawal stagethat the government will have to address to make NPS popular among all,as is the EPF scheme in the organised sector.
What is new in NPS?
Employees of corporate entities enrolled by employers under the Corporate Model scheme will have a separate individual pension account. If the employer does not make choice of the Pension Fund Manager (PFM) or scheme preference,each subscriber will be able to select his/ her own. There are six fund managers and four investment options available for the investors including equity,corporate debt,government securities and an auto lifecycle.
But for all this to happen,companies will have to do some rethinking on their salary structure. Companies will have to restructure the salaries of their employees to avail full benefit on NPS. More than 30 companies have already registered and we are expecting much better response in coming months, said Kamal Chaudhary,CGM,PFRDA.
There are some who see a convergence between NPS and EPFO going forward. Those companies wishing to avail of NPS Corporate scheme will have to contribute over and above the mandatory requirement under the EPFO Act. In the medium to long term,I foresee a convergence between NPS and EPS, said Dhirendra Swarup,ex-chairman of PFRDA.
NPS offers additional tax sops
There are three tax provisions under the Income Tax Act,1961 that you must know to take full tax advantage on NPS contribution.
Section 80 CCD(1): An employee can claim tax deduction of up to 10 per cent of the salary contributed towards NPS.
Section 80 CCD(2): The employee can claim tax deduction on contribution made by the employer,not exceeding 10 per cent of salary.
Section 80 CCE: Employee can claim the self contribution subject to the Rs one lakh limit in Section 80C but will also be able to claim deduction on employer contribution to NPS above the one lakh limit.
Let us take an illustration:
* Annual Salary: Rs 2 lakh
* Dearness Allowance: Rs 1 lakh
* Allowances taxable: Rs 40,000
* Perquisites taxable: Rs 60,000
* Investment u/s 80C : Rs 1 lakh
The employee has contributed Rs 30,000 to his NPS and the employer also makes a matching contribution of Rs 30,000. The deduction under section 80CCD is as under:
While those in the organised sector compulsorily contribute to EPF,others who are self employed and in unorganised sector normally do not have such saving. One needs to understand that due to inflation what costs R 100 today would cost R 107 next year (at 7 per cent inflation) and when compounded over next 20 30 years,the need to meet those expenses grows exponentially. Thus you need to have adequate savings to meet your post retirement expenses and NPS comes as an option for everyone to invest for long term in a tax-efficient manner.
EPF Vs NPS
Both EPF and NPS are meant to build a corpus towards retirement but they are structured differently. While NPS scores over EPF on some points,there are few reasons for EPF to cheer about.
EPF does not have equity exposure but NPS has an equity option wherein over 50 per cent of the investment can be invested into equities. Taking advantage of this option PFMs have generated,an annualised return of upto 17.8 per cent since its inception in May 2009 against 9.5 per cent interest that was available in 2011-12 on EPF.
However,EPF enjoys ExemptExemptExempt (EEE) status while NPS,as of now,is under ExemptExemptTax (EET) regime. This means that at contribution and interest accumulation stage,both the schemes are tax exempt but at the withdrawal stage while EPF is tax free,NPS is taxable.
EPF also scores over NPS on liquidity. While EPF withdrawal is tax free after five years and can be completely withdrawn,NPS does not offer any liquidity till the age of 60. NPS subscriber needs to compulsorily invest a minimum of 40 per cent of pension wealth to purchase a life annuity from an insurance company and both the amount withdrawn as well as annuity of NPS scheme is taxable. If you wish to opt out of NPS before 60,you have to purchase a life annuity for at least 80 per cent of the corpus. According to Kuldip Kumar,executive director at PwC,One needs to wait for the final Direct Taxes Code Bill,under which,hopefully,withdrawal from NPS may be exempted for everyone.
It is just a matter of time when NPS will be granted the EEE status, said a senior finance ministry official
Investing in both
Experts say that nothing stops one from doing so. One can invest in both the schemes and claim tax benefit on both NPS and EPF,subject to the respective limitations, said Kuldip Kumar. While contribution to EPF and/ or NPS reduces the take home salary of a low income category,those in middle or higher management level have a good option to invest in NPS as employers contribution is eligible for tax deduction and that helps to improve their overall return,suggests Kumar.
Experts believe that since NPS forces one to remain invested for a very long term it makes sense to consider it only for retirement savings. While those in the organised sector may look at additional savings in NPS along with EPF,those who are not covered by governments EPF scheme must definitely invest in NPS to secure their retirement. So if you have still not looked at it,open an account today and take a firm step towards secure future.
Industry on NPS
CII is working with PFRDA on promoting NPS among the industry members. Transition to NPS could be encouraged by allowing the E-E-E taxation regime.
NPS should not be viewed as an alternative to EPF but as an additional benefit that employers may provide to employees.
Most companies are adopting a wait-and-watch attitude at present. They will carefully watch how the NPS is performing.