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Rediff.com  » Business » NPS and EPF should get same tax benefits

NPS and EPF should get same tax benefits

By Harsh Roongta
Last updated on: March 14, 2016 16:31 IST
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Illustration by Uttam Ghosh

 

Tax benefit to NPS can be given by exempting the pension received from income tax

Much has already been written about the proposal to tax 60 per cent of the Employees’ Provident Fund corpus on retirement and the subsequent rollback of this provision.

As before, the entire corpus received back from EPF will continue to be completely exempt from tax.

Thankfully, the proposal to exempt 40 per cent of the National Pension System corpus is proposed to be continued.

While this exemption is better than there being none at all, NPS will still remain a poor cousin compared to EPF.

The government has justified the proposal to tax the withdrawal of corpus from both NPS and EPF by citing international precedents.

There is some logic in this argument.

The government, actually, contributes to building your retirement corpus by way of tax foregone on the amounts contributed and on the income generated on the corpus during the accumulation phase.

It does so because this enables you to build a corpus that you can use to buy a monthly pension or, in other words, an assured monthly salary after you retire.

Tax foregone is an incentive so that after retirement, you do not become a burden on the government budget for social schemes for poor people.

In most cases, the monthly pension that can be generated will be much lower than what you earned when you were active and, hence, will be lower than the amount that is chargeable to tax.

However, if the amount of pension generated in any year is high enough for it to be in the taxable bracket, then the government has every right to get back, at least, a small part of the tax that it had foregone earlier.

This tax extracted from the relatively richer retirees can, then, be used to fund the social schemes to provide at least minimum sustenance to those people who have not been able to generate any such corpus or insufficient corpus.

So, in theory, this tax sounds justified. In the Indian context, however, there are no social schemes worth the name for the poorer retirees. So, this tax just ends up as a small morsel for the revenue-hungry government but takes a big bite out of the retiree’s corpus.

There is another reason why this retirement tax is inequitable in the Indian context.

The same principle of taxing at withdrawal what is foregone at the time of investment is not followed for many other investments.

The biggest among these is the exemption of capital gains on sale of a residential house if invested in another residential house.

This exemption is without any maximum limit at all (and can run into multiple crores per taxpayer) and if the taxpayer invests the capital gains in another residential house for only three years and sells that new residential house after three years, the entire capital gains remains tax exempt forever.

It is also available to any number of residential properties owned by the taxpayer.

Even the poorest house owner who sells a house property to buy another is among the relatively well-off Indians and the majority of people who sell one house to buy another are among the top income quartile of all Indians.

The amount of revenue foregone on this account alone is much larger than what the retirees can withdraw (and this includes the richest retirees as well) withdraw in any year.

It is inequitable for the government to forego large sums of tax from the rich Indians, but levy a retirement tax on the middle-class Indian.

Since the government is continuing to give EPF the tax benefit, it is imperative that the entire NPS corpus must be tax-exempt.

If need be, it can be done by exempting from tax the pension received through the NPS corpus.

The revenue loss is, in any case, spread over a number of years and will be made up by the boost to financial savings in the system.

Incidentally, even the 40 per cent exemption benefit is applicable only for employees and not for self-employed taxpayers.

There is no earthly reason for this exemption to be denied to self-employed taxpayers and the government should correct this anomaly at the earliest.

Harsh Roongta is a Securities and Exchange Board of India-registered investment advisor

Illustration by Uttam Ghosh/Rediff.com

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