Most of discussion on report of the Seventh Pay Commission has been about the fiscal impact of the report, and whether the payout will boost consumption expenditure. However, beyond these obvious issues, the most interesting part of this 800 odd page tome is the short chapter on the National Pension System (NPS). Not only does it recommend doing away with the huge flaw in NPS taxation, the discussion also gives an insight into just how shoddy and half-hearted the implementation of the NPS by has been, specially by the state governments.
On the tax issue, the commission notes that NPS withdrawals upon retirement are taxable, while those from equivalent schemes like the PF are tax free. Moreover, there is a service tax liability on the amount paid for the compulsory purchase of annuity upon retirement. It recommends unequivocally that withdrawals under the NPS should be tax-exempt to place the pension system at par with other schemes. The Commission also recommends that the service tax levied at the time of annuity purchase by NPS subscribers should be exempted. These two changes, if accepted by the government, would significantly enhance the the amount of money that a retiree would get under the NPS. After the commission's report came out, the Financial Services Secretary was quoted as saying that there was a case for making these changes, so perhaps NPS members can look forward to tax free returns.
Otherwise, the commission's report paints a damning picture of how callously the NPS has been implemented. For example, for years, All India Services members who are with state governments didn't have their deductions or the government's contribution deposited in their NPS accounts. Shockingly, when forced to in 2012, some state governments just deposited eight years' worth of deductions without any returns or own contributions.
It's completely unconscionable that more than a decade on, basic issues about the NPS are still unresolved. Hopefully, the pay commission's recommendations will be accepted, and incidentally benefit non-government NPS members too.