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Don't Pay Tax on NPS

Budget blues may have lifted, at least for the New Pension Scheme subscribers

Although the Budget never got to anywhere near fulfilling most people’s projections, yet it did manage to create some positive news for those concerned with the New Pension Scheme (NPS).

Though the maligned Exempt-exempt-taxed (EET) method has been retained in NPS, the Finance Minister Pranab Mukherjee may just have left a little bit of scope for a partial loosening of the rule – the withdrawal stage may turn tax exempt if certain conditions are met by the person who is withdrawing his money. Under this scenario, NPS might become a quasi-exempt-exempt-exempt (EEE) structure.

If one takes a look at the provisions of the Finance Bill 2009, it states that any amount which has been set aside by the subscriber for purchase of annuities at the time of its exit, the scheme will be largely tax exempt -- a very negligible amount will get taxed.

The only other condition to be fulfilled is that the annuities must be purchased in the same year in which the subscriber has made an exit from the scheme, reports Financial Chronicle.

That brings us to the question as to how pension subscribers go about the process of not paying tax. They can directly purchase annuities from insurance companies, either out of the gathered amount of their pension, or by using their total accumulated amount.

After this is done, the amount is then paid to the subscribers as monthly pension.

Mukherjee has gone on record on this when he said that the amount which the subscriber would be putting in to purchase the annuities would not be treated as income for the year and therefore, it would be tax exempt.

The entire move may well give much-needed relief to the subscribers as well as persuade others to join – the NPS has not been well-received as subscribers feel they would lose a lot if their money is taxed.

However, among the disbelievers, the moot point is that the FM has retained the EET structure and the tinkering that he has done may not really be beneficial for subscribers.

Some other measures that have been announced for the NPS includes exemption of transactions in securities and other instruments by the NPS Trust from the Securities Transaction Tax (STT) and exemption of income of the trust from any taxation in the interest of beneficiaries.