RETIRAL BENEFITS Additional tax incentives under Section 80CCD for investing in the National Pension Scheme are an effort not just to boost retirement savings, but also to popularise the government scheme

 

In a bid to create a "pensioned society", Finance Minister Arun Jaitley has intro duced various tax incentives as well as a new pension scheme, in Budget 2015. These are not only aimed at boosting retiral savings, but also giving a push to the government's low profile National Pension Scheme (NPS).

The investible limits for pension products have been raised under Section 80CCC and 80CCD.Under Section 80CCC, the deduction limit has been increased from `1 lakh to `1.5 lakh for contribution to pension funds of the LIC or Irdaapproved insurers. Additionally, the deduction limit under Section 80CCD has been raised from `1 lakh to `1.5 lakh for contribution by an employee to the NPS. However, since the pension products from mutual funds fall under Section 80C, therefore, its limit is already at `1.5 lakh.

To give an additional boost to the NPS, the finance minister has created a separate window of `50,000 under 80CCD (1B). "Since this section doesn't fall under the overall cap of `1.5 lakh under Section 80CCE, the deduction of `50,000 for the NPS will be over and above the normal limit of `1.5 lakh," says Vikram Shroff, Head, HR Law, Nishith Desai Associates.

However, insurance and mutual fund players are disappointed with this special treatment only for NPS. The life insurance sector has been completely ignored in the Budget. We expected a separate limit of `50,000 for pension plans, but the finance minister has restricted this increase only to the NPS.

Another critical option that has been offered to salaried employees is that they can now choose between the Employee Provident Fund (EPF) and NPS for securing their retirement kitty. This is a master stroke by the Finance Minister and is very good for investors who want to shift a part of their retirement savings to equities. This is because as of now, their contribution compulsorily goes to structured debt investments. The EPFO trustees are also resisting government's efforts to shift a part of the EPF corpus to equities. With this new measure, the investors have been given the option to decide the asset allocation themselves.

Will this increase the attraction for NPS?

This scheme was introduced to replace the defined statutory pension system for government servants who had joined services from 1 January 2004. Later, this facility was opened to private sector employees. Though the government tried to draw people by treating the employer's contribution outside the taxable limit under Section 80CCD(2), the scheme did not catch on. Now, the NPS is expected to get a boost because of the additional deduction of `50,000. The main reason investors are wary about it is the compulsory provision of buying annuity. At the time of exit, the individual is required to invest at least 40% of the pension to purchase an annuity. So, till other products like the EPF and the PPF remain under the EEE regime, investors are unlikely to be drawn to the NPS.

In addition to the deductions, a new pension scheme has been launched. The Atal Pension Yojana is intended to provide a defined pension, depending on the individual's contribution and the period of contribution. To encourage people to join this scheme, the government will contrib ute 50% of the beneficiary's premium, to a maximum of `1,000 each year, for five years, in the new accounts opened before 31 December 2015.

The government has also announced the setting up of a Senior Citizen Welfare Fund.This will utilise the unclaimed deposits lying in the PPF (`3,000 crore) and the EPF (`6,000 crore) to subsidise the premiums of old-age pensioners, BPL card-holders, small and marginal farmers, etc. However, it may not be a good move for the investors, whose money is lying idle in these funds. In fact, it should be considered a wake-up call to withdraw or consolidate their accounts.