BROKEN PROMISES? ‘Discriminatory’ NPS fails to find takers

New Delhi: The New Pension System (NPS), rolled out to the public from May 1 and applicable to all government employees since 2004, has failed to take off due to its discriminatory nature and has led to a tussle between two departments of the finance ministry.
While the pension division has been asking the revenue department to exempt all income accrued to an employee at the time of his retirement under NPS, the latter has refused to budge and give any concessions.
For instance, person A who joined government on or before December 31, 2003, will not have to pay any tax on the pension benefits that he receives at the time of his retirement. However, someone who has joined office on January 1, 2004, or later will have to pay 30% tax, 10% surcharge if the amount exceeds Rs 10 lakh and 3% education cess, taking the total to 33.99% on his accumulated pension reimbursement that he gets when he is retiring.
The tax amount on the accrued income that includes tax-exempt deposits of previous years is huge, said a senior finance ministry official. If person A is to get Rs 10 lakh, the government will take away Rs 3.40 lakh as his tax obligation on the net disbursal. For someone who is expected to get Rs 20 lakh, the amount of tax outgo could be Rs 6.80 lakh.
Had he been employed a day earlier than January 1, 2004, an employee’s entire tax outgo could have been saved. Interestingly, a person employed with the private sector whose provident fund is deposited with the Employees’ Provident Fund Organisation (EPFO) is also exempted from paying any tax.
The discriminatory policy, a finance ministry official said, was the reason behind the lacklustre response to NPS since its launch. In the one month after it was opened to public (May 1), NPS received only 500 applications and managed to collect a paltry Rs 28 lakh. Footfalls at the 22 points of presence appointed by the Pension Fund Regulatory and Development Authority (PFRDA) too have been negligible.
Investments made in NPS are exempted at two stages for government employees — first under 80CCC with a cap of Rs 1 lakh and then on the interest accrued on this income. However, at the third stage — at the time of withdrawal — the entire amount is taxed, thus nullifying benefits of all previous exemptions.