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Tuesday, October 19, 2021

A just exemption

There is a moral and economic case for not taxing NPS withdrawals.

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Updated: January 21, 2016 12:40:36 am

pension system, national pension system, india pension, pension india, pension tax, india pension tax, business news

The government is reportedly considering exempting fund withdrawals under the National Pension System (NPS) from taxation. If this proposal from the Pension Fund Regulatory and Development Authority (PFRDA) does come through in the ensuing Union budget, it would be a welcome
step. Currently, subscribers’ contributions to the NPS as well as interest earned during the accumulation phase are tax-exempt. But withdrawals from the scheme attract tax, which is not the case with the Employees’ Provident Fund, Public Provident Fund, or even equity-linked savings scheme investments that enjoy exemption at all three stages. Such differential tax treatment makes no sense, especially when the NPS is a social security scheme unlike the PPF, which is a pure interest-earning, tax-saving instrument. Correcting this anomaly would go some way in making the NPS more attractive: Currently, out of its assets under management of Rs 1.08 lakh crore, almost 90 per cent are accounted for by Central and state government employees who have to compulsorily subscribe to the scheme.

But that is not the only reason. Unlike the West and in many other countries, India has no real social security scheme, more so for the unorganised and informal sector that makes up about 88 per cent of its total workforce. These workers, and also government employees entering service after 2004, have to build their own retirement nest eggs. The NPS is one such avenue for citizens to park hard-earned savings generated during their working life. The least the government can do to help this vast majority is not tax these accumulations at the time of withdrawal. It is only fair that those wanting to provide for themselves without relying on government largesse should be granted complete tax exemption at contribution, earnings and the final corpus stage.

The removal of uncertainty over tax treatment on what can be a genuine long-term social security scheme is, moreover, important for a country that desperately needs to build roads, railway lines, power plants, water supply, sanitation and other infrastructure. These projects typically have long gestations, while offering no immediate returns. For that reason, they can only be funded by long-term savings. While foreign direct investment, including overseas pension funds, could be one source, the bulk of it, though, has to be generated internally from within the country. India is today in a demographic sweet spot, where it has a large population that is of working age and can provide these long-term financial savings. The NPS should be tax-enabled to facilitate that.

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