The Union Budget 2021 will be presented on 1st February. So, I believed of creating some recommendations to eliminate some anomalies and inequalities in the Income Tax Act provisions to make the National Pension System fair and a tiny greater for every person. Here are my recommendations.
Uniformities of tax therapy of retirement corpus of Tier I of NPS with Employee Provident Fund (EPF)
The Employee Provident Fund (EPF) scheme was introduced for all the staff in the organized sector to enable them accumulate funds for retirement. Another technique – National Pension System (NPS) – was introduced in 2004, initially for government staff and was then extended for all the Indian citizens. Under the EPF scheme the subscriber gets entire of the accumulated funds to his credit as tax-absolutely free at his retirement with complete freedom to invest the it the way he desires, whereas the NPS subscriber gets only upto 60% of the accumulated balance in his NPS account at the time of retirement as tax-absolutely free and for the balance 40% he has to mandatorily acquire an annuity from any life insurance coverage organization registered with IRDA.
In my opinion, why must the government dictate the subscribers of a single scheme as to exactly where he must invest his retirement corpus and let him get complete liberty to use the way he wishes in the other scheme. This becomes vital specially seeking at the truth that the annuities of insurance coverage firms usually do not give you returns which are capable to beat the inflation and additionally it is totally taxable in the hands of the annuitant.
Investments in mutual funds have turn out to be safer with evolution of mutual fund as an market and strict monitoring by the regulator. The government must give the freedom to the NPS subscriber to invest in any solution of their option, such as a restriction on comprehensive withdrawal of the revenue so as to guarantee that the entire of the corpus is not place to danger. This must apply to subscribers of each the schemes.
Suggestion as regards tax provisions for Tier II account
The withdrawals from Tier I of NPS are tax-absolutely free upto 60% and the balance 40% has to be utilized for purchasing an annuity. But there is no clear reduce provision in the Income Tax Act about how withdrawals from Tier II account must be taxed. Since these are not the mutual fund items, for which there exist precise guidelines, there is confusion about taxation of Tier II withdrawals. There is no clarify as to no matter whether the very same can be treated as equity solution and hence entitled to concessional price of taxes in case the subscriber has opted for 75% or more equity element. Complete clarity will go a extended way in clearing the clouds about Tier II account taxation. The government must promptly bring in clarity about taxation of withdrawals from Tier II account of NPS. Some specialist opine that the complete worth must be taxed which in my opinion is absurd, but then clear reduce provisions will enable us bring in clarify about it.
Presently only the Central Government staff are permitted to claim deduction below Section 80C for contribution created towards Tier II account with a lock in of 3 years. The very same alternative is not accessible to other subscribers. Why such a step motherly therapy is offered to other subscribers is beyond my comprehension. Is it simply because the men and women who draft the tax laws occur to be the Central government staff? All the eligible subscribers must be permitted tax advantage for contribution towards the Tier II account, specially when the Tier II account provides you significantly less risky items as compared with other items of the very same tenure, i.e. ELSS in case the subscriber opts for predominantly debt portion in the Tier II account.
Uniformity of ceiling for employer’s contribution
Tax rewards for contribution towards the Tier I account, for employer’s contribution for the Central government staff, are accessible upto 14% but when it comes to other staff, they are capped at 10% which is eligible for deduction below Section 80CCD(2). This once again shows that the scheme is framed to favor the Central government staff as compared to all the other category of staff. I do not uncover any apparent explanation for this partiality. The government must make the employer’s contribution upto 14% tax eligible for all category of staff.
I really feel that the government must introduce amendments to take care of these anomalies to make the scheme just and fair for every single category of subscribers.
(The writer is a tax and investment specialist, and can be reached at [email protected])