The 2011 Finance Act has added a provision to the tax code that allows employers to take a tax deduction on their New Pension Scheme (NPS) contributions.
In 2003, the Indian government introduced the NPS to allow employers to provide retirement benefits to their employees. The NPS was initially mandatory for government employees hired after 2003 and was then made available to all citizens starting in 2009. Very few plans have been adopted by private sector employers, in part because the NPS was not eligible for the tax advantages we normally expect for retirement saving.
Key Details
Key provisions of 2011 Finance Act include:
A change to the tax code that allows employers to take a tax deduction for NPS contributions of up to 10% of the employee’s pay. This is over and above the 27% of pay deduction already available for contributions to qualified superannuation and provident funds. Future clarifications on tax treatment of the NPS are anticipated.
The act excludes contributions from an employee’s taxable income.
The popularity of the NPS is expected to significantly increase because its tax status will be equivalent to, for instance, a U.S. 401(k) plan.
Currently, NPS account withdrawals are taxable, similar to U.S. 401(k) plans. It is anticipated that this will change in the future so that the NPS will be treated under the tax code using the “EEE” mode. Contributions will be exempt from tax when made; investment income will be exempt from tax when it accrues, and withdrawals will be exempt from tax when made, subject to certain conditions. These changes require revisions in the Direct Tax Code, which are expected to be made in the future.
Read more about this topic in this month's edition of Benefits India.
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