FinMin examines tax exemption for NPS withdrawals

The ministry of finance is examining a Budget proposal by the Pension Fund Regulatory and Development Authority (PFRDA) to exempt national pension system (NPS) withdrawals from tax, bringing it at par with the employee provident fund (EPF) scheme to provide a level-playing field.

"We have made a proposal to the finance minister ahead of the Budget, where exemption of NPS withdrawals from tax is one of the key recommendations. It will be a game-changer for NPS resulting in a substantial increase in the assets under management with more private subscribers coming on board," said a PFRDA official.

The Seventh Pay Commission, headed by A K Mathur, also recommended an exempt-exempt-exempt (EEE) status for NPS, bringing it on a par with the EPF scheme in terms of tax-free withdrawals.

PFRDA: BUDGET PITCH

• Exempt NPS withdrawals from tax bringing it at par with EPF scheme
  * Seventh Pay Commission also pitched for granting NPS an exempt-exempt-exempt status
• Extension of co-contribution incentive by the government beyond December 31 to attract subscribers under Atal Pension Yojana
  * The government has so far got over one million subscribers on board

Currently, the EPF withdrawals after five years of completion of service are tax exempt, while premature withdrawals before five years attracts tax ranging between 10 per cent and 34.608 per cent, barring exceptions.

The EPF enjoys 'EEE' status, while NPS accounts have exempt-exempt-taxed status, where any contributions to the schemes and its earnings are not taxed but amount received on withdrawal is taxed.

"There is indeed a case to provide EEE status to NPS, but the matter is still under examination," said a government official.

In last year's Budget, the finance minister provided employees the option of choosing between EPS and NPS, and a Cabinet note for amendment of EPF&MP Act, 1952, has been sent to the law ministry for vetting. Of the over Rs 1 lakh crore assets under management of NPS, 90 per cent falls under the central and state government schemes.

For the past five years, while the Employees' Provident Fund Organisation has been giving a return of 8.25-9.5 per cent to its subscribers, NPS has given a return of 9.2 per cent and NPS Lite has given a compounded annual growth return of 9.68 per cent.

To incentivise Atal Pension Yojana (APY), the pension regulator has also asked for an extension of the co-contribution incentive by the government beyond December 31 to attract subscribers. It also wants to regulate superannuation funds.

APY guarantees subscribers a monthly pension of Rs 1,000, Rs 2,000, Rs 3,000, Rs 4,000, or Rs 5,000 in turn for the contribution varying from Rs 42 to Rs 210 per month. The APY scheme got over one million subscribers on board by December. According to the current scheme, the government would co-contribute 50 per cent of the subscriber's contribution or Rs 1,000 per annum, whichever is lower, to each eligible subscriber account for five years to 2019-20, who join the NPS before December 31, 2015 and who are not income taxpayers.

Currently, eight pension fund managers manage private-sector funds and only three run by state-owned financial institutions are allowed to manage central and state government funds. SBI Pension Funds, UTI Retirement Solutions, and LIC Pension Fund manage the government corpus. They also manage the private-sector corpus along with ICICI Prudential Pension Fund Management, Kotak Mahindra Pension Fund, HDFC Pension Management, Reliance Capital Pension Fund and the pension fund incorporated by Birla Sun Life Insurance.