There has been a lot of buzz around the recent provisions in the Portability of member’s accumulation from Provident Fund/Superannuation to National Pension System (NPS).

Pursuant to announcement made by Finance Minister in the union Budget 2016, there were certain amendments made to Income Tax act 1961 in the Finance Act 2016 with effect from 1st April 2017

The said amendments provide employees exemption from taxation for one time portability exemption from approved Provident Fund / Superannuation to employees individual NPS account. The amount so transferred will not be treated as an income in the hands of the employee and also it will not be treated as a contribution in the current year & hence no tax benefit can be availed

PFRDA in its circular dated 6th March has laid down the process an individual employee can follow for such one-time transfers.

Does one actually have to Transfer Funds from PF/Superannuation to NPS? 

Each of these pension products has their objectives and advantages

Provident Fund offers tax-free withdrawal of lump sum accrued corpus on retirement; provides a modest return regulated by EPFO & Labour Ministry. It has embedded benefit of life cover through EDLI & Pension through EPS 95

Employer Superannuation schemes are guided by the investment norms prescribed by the Income Tax. If one chooses to fund the scheme with an Insurance company, choice of products is available i.e. products that invest purely in Debt funds or with a debt –equity mix providing a decent return on investments. 

NPS offers a choice to the subscriber either with active participation or by auto choices (Lifecycle funds) providing healthy returns. 

Can all these co-exist?  Yes, these retirement benefits can co-exist. This would help facilitate employees to preserve more wealth for retirement and ensure a decent income stream. It is not only important but would be paternalistic on the part of employers to educate their employees the need for building such corpus for post-retirement income.

An opportunity to save higher tax / & make salary tax efficient 

The employer can help employees make their salary tax efficient. All these offer an excellent opportunity to employees as they provide them with a choice of contributing to these retirement benefits and thereby not only save for retirement but also make their salary tax efficient

It is worth examining the Tax advantages of continued Contributions towards PF, Superannuation Plan & National Pension system (NPS)

Features	Provident Fund (DC Scheme) Statutory Benefit	SUPERANNUATION (DC scheme)	National Pension System (NPS)Supplementary Plan
Max. limit on Employer Tax Eligible* contribution	Exempt up to 12% of salary No Monetary ceiling	15% of eligible salary, subject to limit of INR 150, 000 p.a. per employee (contribution  in excess attracts perquisite  tax)	10% of eligible salary + Dearness Allowance (DA), without any cap The contribution made by the employer under section 80 CCD (2) of IT act up to 10% of salary (Basic + DA) which is in addition to the tax benefits available under Sec. 80 CCE. No Monetary ceiling
Max. limit on Employee Tax Eligible contribution	Up to INR 150, 000 p.a. as per section 80 C of Income tax Act.	Up to INR 150, 000 p.a. as per section 80 C of Income tax Act	Employees own contribution is eligible for tax deduction under sec 80 CCD (1) of Income Tax Act up to 10% of salary (Basic + DA). This is within the overall ceiling of Rs. 1.50 Lacs under Sec. 80 CCE of the Income Tax Act. Additional Tax Benefits Exclusive to NPS. In addition to the deduction allowed under Sec. 80CCD(1) maximum allowed  Rs. 50,000/- under sec. 80CCD 1(B)
Type Of Benefits	Lump Sum on retirement Tax free Annuity under EPS 95	Lump sum: max. of 1/3 of accumulations (OR 1/2 in the absence of Gratuity) and Annuity Lump sum: tax-free up to prescribed limit in case of normal retirement. Taxable by way of resignation  Annuity: Taxable as per the applicable income tax slab of the individual at the time of receiving annuity benefits	Lump sum: max. 60% (OR max. 20% if withdrawal occurs before attaining 60 years of age) of accumulation Lump sum: Tax-free up to 40% at 60 years  on retirement Annuity: min. 40% (OR min. 80% if withdrawal occurs before attaining 60 years of age) of accumulation Annuity taxable: Option available to defer the lump sum up to 70 years and annuity up to 63 years of age)

*Allowed as a business expense under Section 36 (1) iv (a) of Income Tax Act 1961

- If an employer has an existing Superannuation scheme; it is good to continue with it. 
- Both Superannuation & NPS can co-exist offering an opportunity to save higher tax / & make salary tax efficient.
- Under the Corporate model of NPS - Employer’s contribution up to 10% of basic salary out of the purview of taxable income.
- For those employees who are attracted to perquisite tax employers may contribute the excess over INR 1, 50,000 to NPS or still better contribute up to 10% of basic to NPS. 
- This would help preserve more wealth for retirement thereby higher corpus available for purchase of annuity under both Superannuation & NPS, that ensures higher stream of post-retirement income

Employees may exercise the option of portability of Superannuation to NPS during the final year of retirement whereby they have the advantage of 40% of commutation of both the accumulations put together and secure one single annuity payout, besides 100% tax-free withdrawal of accrued Provident Fund

Provision of one-time transfer 

Provident fund is governed by EPF act. Employees covered under mandatory provident fund may not be able to transfer it unless the EPF act is amended to allow such transfers. 

Even if the employer would like to weigh options of allowing a one-time transfer of PF/Superannuation the Trustees will have to examine the provisions of the Trust Deed read with provisions of the Income Tax Act, 1961.

Income Tax provisions for Provident Fund and Superannuation are governed by Part A & Part B of the Fourth schedule respectively. This would mean the employer will have to amend the provisions of their Trust Deed & Rules allowing Trustees for such transfers into an NPS account.

The key takeaway is that now an employee has a choice to move funds weighing his individual circumstances and take advantage of what suits him the best.

Mr. Arun Rao worked in the private sector & recently retired after a long innings having worked with different employers among manufacturing/ engineering sector. One among his employer provided a defined contribution pension (DC). The DC scheme is based on a fixed contribution as a percentage of base salary. The contributions made during the active work life along with the interest earned forms the corpus to purchase an annuity from an annuity provider Mr. Rao also withdrew some of the accrued Provident Fund while changing jobs and did not transfer it to new employer. The lump sum Provident Fund he received from his last employer was not handsome enough. .Mr. Rao gets a paltry pension out of the DC pension. He has received some lump sum of his Provident Fund accumulations and gratuity. He could not avail the benefit of NPS as it was available at the fag end of his career His spouse is a house wife. His only son is away and married to US Citizen. With the given situation the couple are left to fend for themselves

Mr. Rao is not sure how long his paltry pension and retirement savings is going to sustain him and his spouse through the old age. The couple seems to be living with constant worries and concerns of their future.

An employee can derive tax benefit out of restructuring his CTC incorporating both NPS & Superannuation under both heads. This would not only help build a decent corpus & would also help enhance pension payouts; particularly it would be of value when the regular stream of income stops on retirement.

The tax treatment makes contributions to both NPS & Superannuation an efficient tax saving tool.

HR Fraternity can help employees build & preserve much-required wealth for retirement. Employers not only being paternalistic but also have a vital role in bringing in awareness among their employees of the need for the post-retirement income during old age to help them keep the wolf from the door. 

The following are examples as to how an employee can derive tax benefit out of restructuring his CTC incorporating both NPS & Superannuation as part of their CTC.

* Assuming that tax benefits u/s 80C Rs1.50 Lakh is utilized for other investment avenues available for investment