After Union Finance Minister, Arun Jaitley announced the budget for 2016, roughly 8.5 crore employees, whose retirement funds are managed by the Employee Provident Fund Organization (EPFO) will have another option. They would be able to transfer approximately one-third of their EPF contributions to the National Pension System (NPS). This scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Currently, 24% of the salary of employees whose income is up to INR 15,000 per month is deducted as EPF savings. Out of this, 8.33% is diverted to the EPS to provide monthly income to retirees. This can now be optional and the amount could instead be invested in the new national pension system. However, there is some uncertainty over whether the government will share the subsidy (currently amounting to 1.16% of the income of up to INR 15,000) to the NPS for employees choosing this new option.
The Budget 2016 has also proposed EPF contributions for employees earning lower than a pre-determined monthly salary as an option. However, the employers will have to continue contributing 12% of the salary as their contributions to the EPF.
Promoting the NPS
This new regulatory proposal is another way to encourage people to contribute to the NPS, which commenced in 2009. The Finance Minister had announced another measure in his last budget to promote the NPS. In the last budget, an additional contribution amount of INR 50,000 was allowed for tax deductions under section 80 CCD(1B) of the Income Tax Act. This additional amount was over and above the INR 1.5 lakh limit available under section 80C of the Income Tax Act.
The number of NPS accounts from March 2015 until now has increased from 87 lakhs to 1.15 crores, primarily because of the additional NPS tax benefit under section 80 CCD(1B). However, assets under management (AUM) are significantly lower for the new national pension system at INR 1.10 lakh crores, as compared to the AUM of the EPFO, which exceeds INR 10 lakh crores.
Some officials also indicated that government authorities may allow micro, small, and medium businesses to reduce statutory EPF contributions by 50% on behalf of the employees. This is with the objective of promoting the creation of additional employment opportunities within the formal sector.
Brief Overview of the NPS
Any person aged between 18 and 60 years can contribute to this new tax saving investments scheme. It is aimed at providing retirement income to low-income groups with the lower cost structure. In addition, users can enjoy NPS tax benefits under section 80 CCD of the Income Tax Act.
On maturity, contributors can withdraw up to 60% of the corpus as a lump sum. Minimum of 40% of corpus is converted to an annuity scheme, which is available until the demise of the contributors or as per choice of subscriber. All of these developments have enhanced the value of the NPS scheme, making it increasingly attractive to many investors.
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Disclaimer:Tax benefit is for indicative purpose only. The calculations are made on the assumption that the conditions mentioned in the relevant sections of the Income Tax Act, 1961 are fulfilled. Tax laws are subject to amendments from time to time. This is not a legal advice or tax advice and users are further advised to consult their tax advisors before making any decision or taking any action.
