Finance minister Arun Jaitley announced in the Lok Sabha on Tuesday that he will roll back the tax on salaried Middle India’s one true friend—the Employees’ Provident Fund (EPF). The Budget had proposed to tax 60% of the EPF corpus on retirement, leaving 40% tax-free. But if the 60% was invested in an annuity, it would remain tax-free; the tax will be paid on the income the annuity generates. The National Pension System (NPS) has retained tax-free status for 40% of its corpus. You can take 60% of your NPS corpus as a lump sum at age 60 and 40% must go to buy an annuity. Of the total NPS corpus, 40% will now be tax-free and you will pay slab rate tax on 20% of the corpus. If your NPS corpus is Rs.100, then your tax is on Rs.20. The annuity income is taxed at slab rate.
There has been a tactical roll-back today but clearly the pension space is up for a review—the Ministry of Finance just saw what havoc piecemeal change can cause. As a retirement corpus-targeting Indian, I would like to see several design changes in the way we are offered retirement products and choices. Allow a choice of retirement products for accumulation. My choice set should include the option to not ride a formal pension plan and do it myself. If I want to choose a pension product, I should be able to choose between the EPF, NPS, pension plans run by life insurance companies and retirement-targeting funds run by mutual funds.
