The Reform NPS Withdrawals Need – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/the-reform-nps-withdrawals-need/articleshow/84954633.cmsSynopsis

Exiting subscribers should be free to invest in any capital asset of their choice that offers a steady stream of income. Today, when a subscriber to the NPS superannuates, she has to use at least 40% of the accumulated pension corpus to buy an annuity.

Openness to more flexibility on the kind of assets, investment in which would make withdrawals from the National Pension System (NPS) free from tax, is welcome. However, it is not enough to add Systematic Withdrawal Plans and inflation-indexed annuities benchmarked to 10-year government securities to the annuity schemes exempt from tax at present. Exiting subscribers should be free to invest in any capital asset of their choice that offers a steady stream of income.

Today, when a subscriber to the NPS superannuates, she has to use at least 40% of the accumulated pension corpus to buy an annuity. Income from annuities is fully taxable. The balance 60% of the funds can be withdrawn as a tax-exempt lump sum. There is no reason why a subscriber to the NPS cannot invest in a house that gives her steady rental income or in the shares of a company that offers good dividends (read: a steady stream of dividend income). As long as the investment is in a capital asset, the nature of the capital asset should not really matter. Some savers might prefer the simplicity of bank deposits with added senior citizen premia on the rate of interest.

Sparing the capital asset from tax and taxing only the income stream from the capital asset will remove artificial distortions. It will encourage people to churn their portfolios as reinvested gains will not attract tax. The original Direct Taxes Code had proposed exempting the contribution, exempting the accumulation, and taxing the withdrawal at the normal income-tax rate (irrespective of whether the savings is deployed in short- or long-term assets). This is rational and must be revived. It will ensure that the burden to look after the retired person does not fall on the State.

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