Pension Society- a need for tomorrow

After the budget announcement there was a loud noise made against the taxation of partial EPF proceeds on withdrawal.Although, this decision stands revoked now by the finance ministry, lets understand what is the logic behind the earlier proposal made and how it would have impacted the EPF subscribers.

The announcement:

At the time of withdrawal, 60% of money contributed to an EPF account after April 1 2016 would be made subject to tax, unless it was re-invested in an annuity. Also, only the interest earned was to be taxed and not the entire corpus. This proposal would apply to those drawing salary over Rs 15,000 pm.The number of subscribers to be affected by this announcement were very low. Also, the contribution made by employer towards EPF more than Rs.1.5 lakhs in a year would also be taxed in hands of employee.

The intention :

To create a pension society, to reduce the dependency of non working population on the working class. This is in line with our growing older population and increase in social spending in our national budget. The government wanted people to save for their old age. Hence, the annuity was made as the option. This would ensure that a person gets guaranteed amount every month after retirement.

Our verdict:

The taxation on EPF proceeds was a positive step but made in a rush. It didn't prepare proper ground for people to relish the fact that the intention of government is to create self dependency. As per current sources of finance ministry, out of 37 million subscribers of EPF, only 7 million have salary more than Rs 15000 pm. Also, currently out of employers 12% share to PF only 8.33% is sent out for pension. Thus, to accentuate this saving in pension it was intended to have made compulsory savings in an annuity kind of pension product. Also, it could bring parity to the other existing retirement product of National Pension Scheme, where an individual is partially taxed at retirement. But since it gave exposure in equity the returns expected on it are better than regular pension. 

 

India’s retirement system ranks last in the 2015 Melbourne Mercer Global Pension Index (MMGPI) report. The index value of India stands at 40.3 based on review of reduction in household savings. This index compares around 25 economies on 40 indicators under sub indices of sustainability,acuracy and integrity. To improve our situation,we need to make the pension market more competitive, what we need is more annuity like products. Currently, we just have handful insurers selling to us expensive pension products. Having a narrow approach to the intended benefit is not befitted for a tension free retirement.