VR Logo

Tax Exemption for NPS?

People may get to view a better version of the New Pension Scheme

Despite its introduction since May 1, the National Pension Scheme (NPS) has failed to evoke much of a response. But that might change very soon, with the improving possibility of the government considering extending tax benefits, which are currently not available in the scheme, to people putting money in the NPS, to bring it on a par with older pension programmes.

The finance ministry is gearing up to table Budget 2009-10, which is likely to be presented in the first week of July. According to sources, the ministry is considering a proposal to include pension contributions by private citizens to NPS n the Rs 1-lakh limit for tax-deductible investments under Section 80C of the Income Tax Act, 1961.

Section 80C allows taxpayers to claim tax deductions on contributions made to specified long-term savings products like life insurance, provident funds and savings certificates. The government employees who joined service after January 1, 2004, and are part of NPS, already enjoy this benefit under Section 80CCD.

Analysts however attribute different reasons behind the unsuccessful run of the NPS despite being introduced in May. Primarily, the reason attributed is that the NPS had few takers for its unfavorable tax treatment vis-à-vis alternative schemes like the Public Provident Fund or the Employees Provident Fund.

Even Pension Fund Regulatory & Development Authority (PFRDA) interim chairman Dhirendra Swarup while acknowledging the fact has said, “The slow start is on expected lines. Unavailability of tax benefits dissuades people from opting for NPS”.

The NPS is the brainchild of the UPA government in an attempt to create a social security system, as well as save the Indian state from being drowned under the ever-increasing  pension payment load on the its finances, which would be accessed by all citizens.

Meanwhile the PFRDA has been asking for a level-playing field for NPS with EPF and PPF, which are exempt from tax at the point of contribution, accumulation and withdrawal, or inclusion in the EEE (exempt-exempt-exempt) tax regime.

While the Revenue Department in the Finance Ministry has ruled out such treatment, it is likely to accept the inclusion of citizens’ NPS into the basket of products included under Section 80C, senior ministry officials said.

“Under the IT Act, Section 80CCD offers tax deduction in all ‘employer-employee’ relationships. That means all those people working in state and central governments as well as private individuals in employer-employee relationships are eligible for it. However, self-employed individuals, professionals like doctors, lawyers and unorganized sector employers are not eligible,” said Swarup.

He however confirmed that PFRDA has sought the extension of the Section 80CCD benefit to such individuals too.

Also read
Regulator's Ruling
Who's Going to Sell the NPS?
NPS to be Unveiled in May
New Pension Scheme