The finance ministry is considering a proposal by the pension regulator PFRDA to extend the tax deduction limit from 20% to 24% of the salary or income of corporate employees and self-employed subscribers of the National Pension System (NPS) to bring them at par with the subscribers who are government employees.
It is also looking at another suggestion to treat the annuity income of corporate sector retirees from NPS as ‘salary’ so that the beneficiaries get the standard deduction available to the salaried class.
An NPS subscriber can claim tax deductions up to Rs 2,00,000 under Section 80C (Rs 1,50,000) and 80CCD (Rs 50,000) for her contribution under the Income Tax Act.
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Since FY20, the Central government staff has been eligible for a deduction of 24% of salary (employees’ contribution of 10% and employers’ share of 14%) for NPS contributions, and the benefit was extended to state government employees from April 1, 2022. But the limit continues to be 20% (10% contribution of each by employer and employees) for the private sector as well as public sector and autonomous body employees. This is despite the fact that public sector banks have already enhanced employers’ share to NPS to 14%, taking the total contribution for their employees to 24%. Similarly, self-employed individuals contributing to NPS are eligible for 20% of gross income.
“There should be parity among sectors within NPS. Since the entire 14% contribution by the central or state government for their staff is tax-free, the same benefit should be extended to the corporate sector and individuals subject to the condition that NPS is the only superannuation benefit for these subscribers,” PFRDA chairman Supratim Bandyopadhyay told FE.
For contributions to the Employees Provident Fund Organisation (EPFO), subscribers are allowed a 24% tax deduction (12% of basic pay each by employee and employer).
Currently, standard deduction Rs 50,000 is available to salaried employees as well as pensioners if the benefit is provided by their employers. Under NPS, the retirement benefit is provided by third-party service providers and hence is treated as ‘other income’ and no deduction is available on such income.
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Annuity to corporate sector employees is as per their employment contract and is contributed from their salary. So, income from that annuity should be treated as salary, Bandyopadhyay said.
Under NPS, 60% of the accumulated corpus from contributions during a person’s working years is allowed to be withdrawn at the time of retirement. Such withdrawal is tax-free. The balance 40% is invested in annuities, which according to an estimate, generate about 5% annual return. The standard deduction will compensate to some extent the lower returns from annuities as well.
After stagnating for over a decade, the NPS is gaining traction in the corporate sector with enrollments doubling to 1.62 million between March 2019 and December 2022 while individual enrollments have nearly tripled to 2.61 million during the period.
Higher tax-saving potential (additional Rs 50,000 deduction available for NPS over and above the 80C limit) and attractive returns vis-à-vis other traditional products are seen spurring demand for NPS (around 10% CAGR compared in the last 13 years with 8% or less in other superannuation funds).
With the saturation level reaching the government sector, the private sector will drive NPS growth in the coming years. The total number of NPS subscribers as of December 17, 2022, was 60 million, 72% of which are in the Atal Pension Yojana (a government-backed, voluntary scheme meant to provide old-age income security in the form of minimum assured pension in the unorganised sector).
However, in terms of assets under management (AUM) under NPS, the central government and state government subscribers account for 79% of the Rs 8.5 trillion as on December 17, 2022. The corporate sector accounts for 13% of the total NPS AUM.
