Taxpayers, young or old, invariably feel that the investment limit under Section 80C and 80CCF are low
Saving, that too for retirement, would be the last on the minds of Gen Y. It is in this context that organizations could educate employees about NPS and its inherent benefits – both long term and short term.
Interactions with heads of HR of various organization on the aspirations of the present day workforce invariably highlight the uptrend in ‘live for today’ attitude. Increasingly, Gen Y employees want more cash in hand, are excited about a company car and would ideally prefer a company-leased accommodation under a flexi benefit scheme. Given this background, it would indeed be a challenging task for companies to introduce a pension scheme as an integral part of its benefits plan and all the more to encourage the growing Gen Y workforce to opt for it. Retirement planning perhaps would be the last on Gen Y’s list of priorities. Is there a way out?
Taxpayers, young or old, invariably feel that the investment limit under Section 80C and 80CCF are low. It is herein that, companies can educate its employees and more so Gen Y about National Pension System, NPS. This would ideally serve dual purpose, first one being that of availing an additional 10 percent (of basic salary) as tax deduction and second (and more important) that of inculcating the habit of saving for future. Under the newly introduced Section 80CCD (2), up to 10 percent of an employee’s basic salary put in the National Pension System is tax deductible. But how can organizations help employee’s in this case? According to the new clause, this is one investment that the taxpayer cannot make on his/her own. The investment (a voluntary one at that), needs to be deposited by the employer on behalf of the employee. It is herein that employers could do well to tweak its compensation structure a little to include this benefit in its emolument package.
NPS provides private sector employees a chance to augment their retirement savings. C R Chandrasekar, CEO, FundsIndia, says, “NPS is a good instrument of investment for retirement planning. Besides the tax benefits, it is simple, portable (the account continues even if the employee changes city, job or pension fund manager) and regulated. However, the most interesting aspect of NPS is its low cost.” Employees stand to have multiple benefits beyond tax savings:
•Accumulation of retirement corpus during active employment – tax component being saved through contribution to NPS will accumulate a substantial corpus, thus supplementing retirement income.
•Portability – 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, a unique permanent retirement account number is allotted to each individual. Hence the account is linked to the individual and not tied to the employer. This makes it easy and flexible for the employee to make contributions independent of employer as well as balance tracking through one NPS account.
•Investment in NPS is simple, cost effective and provides employees with a choice of fund managers and asset classes depending on the employee’s risk appetite. While the minimum investment is Rs 6,000 per annum, there is no upper limit.
•NPS is regulated by PFRDA with transparent investment norms, regular monitoring and performance review of fund managers by the NPS trust.
•Easy for the employers to implement NPS for the benefit of their employees while encouraging them to build a sizable corpus for a stream of post retirement income.
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.
Given the tax saving potential of the provision with a long term impact on retirement benefits, a few companies are offering this benefit to their employees. Wipro is one such company and HCL is yet another company that is contemplating on including Section 80CCD (2) in its compensation structure. Having said this, there is little awareness about this newly introduced clause and hence the lukewarm response from corporate India. It is worthwhile for employees and employers in the private sector to re-examine this option to their advantage.