NPS - green signal for private employers?

It is common knowledge today that the recent budget exercise provided little relief to salaried taxpayers.The only other talking point has been the National Pension Scheme (NPS) related provisions.

But NPS has so far received a lukewarm response from corporate India, mainly due to lack of awareness.Given the significant tax benefits, it may be worthwhile for employees and employers in the private sector to re-examine this option to their advantage.
Brief introduction

NPS is touted as a game-changer in the social security arena.Till recently, the social security scheme for non-government employees comprised mainly of two components - the Provident Fund Scheme, or PF scheme, which is applicable to specified employees working in an Indian establishment and the Public Provident Fund, which is available to the general public.

NPS is a scheme where the pension benefit is a factor of the contributions made by the employee rather than as a factor of the salary at the time of retirement / death (or the defined benefit mode).NPS was introduced mandatorily for government employees given the onerous pension obligations faced by the government under the defined benefit based pension schemes.

In May 2009, the NPS was opened for the general public, including employers and employees in the private sector.

Why NPS?

Building your retirement kitty - Most private sector employees, who contribute to the PF are also contributing 8.33% of their base salary to the pension scheme under PF.

The government also contributes 1.16% of the base salary to the private sector employee’s pension account.Unfortunately, those employees, who believe that their retirement nest-egg is in good shape, would be dismayed to learn that the contributions they and the government currently make to the pension scheme under the PF scheme would net them a monthly pension of a maximum of Rs3,250 per month. NPS gives private sector employees a chance to augment their retirement savings.

Portability - Employees in the private sector today rarely stick to one employer for a noteworthy period. Most employees average three to four employers in a decade.One of the drawbacks of the current PF scheme is that the employee is required to open a PF account with each employer.Further, withdrawal / transfer forms for PF (and resultant pension benefits) need to be processed by each employer.Under NPS, there is a unique Permanent Retirement Account Number allotted to an individual, which make it easier for the employee to track and retain his pension, without recourse to the employer.

Administration - Investment in NPS is fairly easy, cost-effective and provide the employee a plethora of choices - any of six fund managers to be used for the investment and three asset classes (low risk, medium risk and risky) for the fund manager to invest in based on the risk appetite of the employee.Further, there are caps on the quantum of contributions in each asset class, depending on the employee’s age, should the employee not wish to actively make choices.

Tax benefits

The contributions made by the employee to the NPS qualify for a deduction from taxable income. This deduction is capped to the overall limit of Rs100,000 that is available for life insurance premium, PF contributions, housing loan re-payment, etc.The employer contribution, up to 10% of the employee’s salary, also qualified for the deduction, but until recently was capped to the overall limit of Rs100,000 as well.

Effective from the current fiscal, the employer contributions to NPS would not be subject to the cap of Rs100,000.There is now, therefore, an opportunity for private sector employers to offer NPS as a tax saving investment option for employees.

For salaried taxpayers in fact, with the Direct Taxes Code (DTC) provisions looming large, there are very few tax planning opportunities available, thus giving an impetus to both employees and employers to take up NPS.

Comparison of long-term retirement investments

Most employees shrink away from investments that do not provide liquidity.Hence, mutual funds / investments in the stock market, which are relatively easier to exit, seem attractive at first glance. However, one ought to look at NPS as mainly a tool to plan retirement and hence a comparison of NPS with current retirement planning avenues, would help us determine its footing.

Investment in NPS through the employer has significant tax benefits that are comparable with the tax treatment of contributions to PF.It is expected that the NPS benefit would be treated as exempt even at the time of exit under the 

proposed DTC.This ought to make the NPS even more attractive as a retirement savings tool, going forward.

Source; dnaindia.com