INTRODUCTION
The term ‘retirement’ conjures up images of a peaceful life filled with travel, joy and leisure. However, the road to that destination is a complicated maze paved with toll booths named ‘Taxes’. Retirement accounts are the cornerstone of any financial planning for the elderly, promising stability and freedom in their old age. This nest egg for the golden years is subjected to different taxation rates depending upon the scheme under which they are accumulated. The three primary pillars of retirement account systems are the Employee Provident Fund (EPF), Public Provident Fund (PPF) and National Pension Scheme (NPS). Each of these schemes comes with its own set of implications and challenges that require careful navigation and understanding.
RETIREMENT ACCOUNTS IN INDIA
The Indian retirement ecosystem is tapered to suit various needs. Alongside the 3 major retirement schemes, there also exist other minor plans, such as the superannuation fund and insurance pension plans.
- Employee Provident Fund (EPF)
The EPF is one of the most popular welfare schemes governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 for salaried employees. The Employees Provident Scheme, 1952 was set up with the aim of providing post-retirement benefits for the employees or their legal heirs in case of sudden death during the course of employment. Under this scheme, it is the duty of the employer to deduct a percentage of the employee’s salary and contribute it toward EPF. Currently, 12% of the employee’s basic salary and dearness allowance is contributed towards EPF, earning interest at 8.15% p.a. The contributions made towards EPF are eligible for S.80C deductions under the Income Tax Act, 1861, capped at ₹1.5 lakhs p.a. The interest accrued on such deposition is also tax-free up to a statutory rate of 9.5% p.a., and the maturity proceeds are exempt from tax under S.10(12), provided the employee has completed a minimum of 5 years of service.
- Public Provident Fund (PPF)
The PPF, governed by the Public Provident Fund Act, 1968, is a long-term scheme to build a corpus for retirement, with Exempt-Exempt-Exempt (EEE) tax status. It has a minimum maturity period of 15 years, which can be extended further in increments of 5 years. It is an excellent investment option for people who are wary of risks. This scheme allows for investment from a minimum ₹500 up to a maximum of ₹1.5 lakhs for each financial year. Deposits may be made as a lump sum in a year or as monthly installments. Any such contributions qualify for S.80C deductions and the interest and final corpus earned are entirely tax-free under S.10(11). The current rate of interest has been fixed at 7.1% and is subject to quarterly revisions by the government. While a great tool for investment, this scheme limits liquidity.
- National Pension Scheme
The NPS, a relatively new scheme introduced by the Government in 2004, is a pension scheme open to all employees from private, public and unorganized sectors, except those from armed forces. Salaried individuals can invest up to 10% of their basic salary, while self-employed individuals can invest up to 20%. These contributions are eligible for tax exemption under S.80CCD (1) and an additional exemption of up to ₹50,000 under S. 80CCD (1B), both with an overall limit of ₹1.5 lakhs. While the NPS offers much higher returns than the other traditional schemes, only 60% of the corpus can be withdrawn tax-free. The remaining 40% must be used to purchase an annuity and the income so generated is taxable under the applicable slab rate. The entire corpus can be withdrawn when it is equal to or less than ₹5 lakhs and it would be tax-free. In the event of a premature withdrawal, 80% of the corpus must be used to purchase an annuity unless the maturity amount is ₹2.5 lakhs or less, in which case the entire amount may be withdrawn.
TWO SIDES OF THE COIN
The primary issue with the current tax regime is its unnecessary complexity and irregularity. While some schemes like the EPF and PPF enjoy entire tax exemption, the NPS comes with a mixed structure. This lack of uniformity not only discourages subscribers from diversifying their investment but also makes it hard to predict post-retirement cash flows. Moreover, the complex tax jargon hinders taxpayers from understanding their own rights. They are forced to rely on accountants, which is not always beneficial. Studies have reported that over 10% taxpayers have failed to claim the additional deduction available under S.80CCD(1B). The lack of financial literacy obstructs tax payers from realizing the entire benefits of the schemes. Moreover, taxing the annuities under the NPS scheme places an unfair financial burden on retirees, discouraging them from investing in the scheme.
Supporters of the scheme argue that the current schemes incentivize long-term savings and also align with the government’s fiscal goals. The flexibility offered by the NPS scheme allows even the poorest to set aside some money for their old days. The deductions provided under IT Act, 1961 reduce immediate tax liabilities. The differences in the schemes provide options for taxpayers to choose from that are best suited to their needs and fiscal goals.
A LOOK AHEAD
The declining trends in household savings emphasize that the current taxation rules on retirement accounts are not very friendly to a common middle class man or to one who lacks financial knowledge. The vast disparities in the three schemes are confusing for many and call for urgent reforms. In fact, the current system perpetuates inequalities rather than alleviating them. Harmonising the tax rules of EPF, PPF, and NPS might be the first step towards simplifying the retirement tax regime in India. Further, revising the stand with regard to annuities in the NPS scheme is another crucial aspect. Retirement accounts are the safe nest for retirees and should not become a burden in itself.
A fundamental issue is the lack of financial erudition among the common public. It would be prudent to simplify the language used while simultaneously educating people on their financial rights. Integrating fiscal literacy as a mandatory module from school to college levels would inculcate essential real-world skills in students from a young age, preparing them to navigate their financial investments and to make informed decisions throughout their lives. It is crucial to increase awareness for the older generations through campaigns and digital tools such as mobile apps and online calculators, bridging the gap between their planning needs and the complexities of taxation.
CONCLUSION
Tax implications on retirement accounts in India are an intricate interplay of fiscal policy, social security objectives and individual financial planning. The current schemes, while diverse in their potential, are limited by challenges and a lack of financial awareness. In a rapidly evolving world where the nature of money itself is undergoing revolutionary changes, it is important to ensure that our country has a balanced tax framework.
A simplified, equitable system would boost public confidence, encouraging greater participation and financial security for individuals from all income levels. Ultimately, the road to retirement should not be a taxing one. By addressing the challenges presented by EPF, PPF and NPS schemes, India has the potential to pave the way for a robust retirement ecosystem suited the needs of people from all walks of life.
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