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Pension Bill gives teeth to pension regulatory body

The Pension Fund Regulatory and Development Authority (PFRDA) Bill 2011 has finally been passed by Parliament. The basic pension scheme under the PFRDA is the New Pension Scheme, now rechristened as the National Pension System (NPS). It is a defined contribution scheme and, currently, there are well over five million subscribers with an aggregate corpus of approximately 35,000 crore. Another great feature of the bill is that it provides subscribers a wide choice to invest their funds including in assured returns by opting for Government Bonds, as well as in other funds depending on their capacity to take risk. It pegs FDI in pension sector at 26 per cent or such percentage as may be approved for the insurance sector, whichever is higher. Such a provision is likely to lead to attraction of higher FDI in the pension sector in India.

The NPS has been made mandatory for all the central government employees (except armed forces) entering service with effect from January 1, 2004. It has been thrown open for all citizens including unorganised sector workers, on voluntary basis, from May, 2009. With the approval of PFRDA bill, even the portability in NPS has been permitted from one scheme to another, if the subscriber seeks to change it according to his risk profile.

The NPS carries a unique feature wherein subscribers can plan their investments according to their age and risk appetite. A subscriber has the flexibility to make contributions on a systematic basis, which could be monthly, quarterly, or annual. Like any other pension plans, contributions made by the individual would be eligible for a maximum annual deduction of Rs 1 lakh under Section 80CCD, read with Section 80CCE, of the Income-Tax Act, 1961. It also offers under Section 80CCD(2) of the I-T Act. Under the I-T Act, for the contributions made by the employer up to 10% of the basic salary and dearness allowance towards NPS qualify as a deduction in the employee’s hands.

NPS requires compulsorily purchase of an annuity so that you get some money in lump sum and the balance in annuity. Broadly, the lump sum and annuity are both taxable under the IT Act as NPS follows an Exempt-Exempt-Taxable (EET) concept. However, under the proposed Direct Taxes Code (DTC) which is yet to be brought into force, NPS is proposed to be covered under the Exempt-Exempt-Exempt (EEE) regime wherein the employee would enjoy the tax benefits when contributions are made. The accumulations to the fund would continue to be tax-free and withdrawals from the fund are proposed to be exempt. Schedule 6 of the proposed DTC provides a list of income that will not be included in the total income of an individual. This list includes ‘any payment from NPS also.

As the withdrawals are likely to happen in DTC era for most of the people, NPS can become an attractive investment opportunity. We don’t have many pure pension products, but with these developments, we may see more pension products coming in the future.

The new law could help bring in new pension products in the market, thereby giving choice for customers. Competition could also improve quality of service, returns. If these are successful, they could help mobilize substantial long term funds which can be used in building infrastructure. Even the evolution of bonds and other securities and instruments would encourage the potential subscribers to participate in scheme like NPS, particularly once the proposed DTC finally comes out, with a EEE stance towards NPS.

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