Dhirendra Swarup, architect of NPS wants to you to be taxman’s guinea pig
The National Pension Scheme (NPS) was launched in 2004, as a defined-contribution-based pension system, which would nudge people into long-term savings, that would provide a comfortable retirement income. Eleven years later, even those involved in the launch of NPS seem confused about its design, marketing and taxation.
Initially, this excellent savings product failed to take off because no one would market it: the pension regulator had decided that no sales commission would be paid to distributors. At Moneylife magazine, we still thought that NPS was worth recommending to savers, until a new chairman at the pension regulatory body began to fiddle with its structure and sent out mixed signals on commissions.
Ever since its launch, the finance ministry has struggled to find ways to make the product more attractive. One finance minister decided to credit Rs1,000 into each new account opened in 2010, for five years. Even that has not attracted ordinary people. Then, the 2015-16 Budget not only increased the tax-deductible investment limit for NPS under Section 80CCD—from Rs1 lakh to Rs1.5 lakh—but offered the provision that an additional Rs50,000 invested in NPS can be claimed as a deduction under the new Section 80CCD (1B). Will this drive people to invest in NPS? Yet another finance minister, it appears, does not understand what makes people choose long-term investments.
On 23rd March, Dhirendra Kumar, an investment expert, asked and answered this question in his column in The Economic Times: “Will NPS (National Pension System) investors be hit with a tax surprise when they retire? The unfortunate answer is that no one knows with certainty, and no one in the government has bothered to clarify.” Unlike other long-term investments, like public provident fund (PPF), the NPS corpus cannot be entirely withdrawn by the saver—40% of it has to be compulsorily invested in buying an annuity and the pension earned on it is taxable. The remaining 60% can be withdrawn; but it will be taxed, too.
Dhirendra Kumar argues that NPS should logically be treated like a debt-oriented hybrid investment scheme with regard to its tax treatment—in effect, investment return from NPS should be treated as a capital gain with the benefit of indexation. Since there were contradictory views on the issue, he checked with Dhirendra Swarup, a former Union secretary and the first Pension Fund Regulatory and Development Authority (PFRDA) chairman. Mr Swarup, he writes, thought that it made sense for indexation benefit to be available for NPS, but “it would actually get tested only when someone would file an income-tax return with such an assumption, and then the assessing officer would reject it and then there would be a round of appeals and cases and arguments and so on.”
The absurdity of this situation is only rivalled by the shocking comment of Mr Swarup. The architect of NPS and the investment expert are both wrong, apparently. There is no need to wonder about tax treatment on NPS. A government circular has clearly clarified that the entire corpus will be taxable without any indexation benefit. Astonishingly, not only does the former pension regulator not know this but, as a bureaucrat who earns a hefty, inflation-adjusted pension from the government, Mr Swarup is nonchalant about a senior citizen having to become a guinea pig to test out the tax treatment on a long-term retirement product he has created. The middle-class investor should thank his lucky stars that s/he has steered clear of NPS.