Pension regulator pitches for tax incentives in upcoming Budget 2021

The Ministry of Finance has received suggestions from financial sector regulators in the run-up to the Budget.

While the pension fund regulator has sought to increase the income tax deduction by Rs 50,000 per person under the new pension scheme, the GIFT city regulator has pitched for easing investment by non-resident Indians.

The Pension Fund Regulatory and Development Authority (PFRDA) is of view that increasing the threshold for availing of income tax deduction to Rs 1 lakh from the existing Rs 50,000 under the new pension system (NPS) would encourage more people to participate in it.

The deduction was given in the Budget for 2015-16.

The pension regulator also wants tax parity for employees of state governments and private companies with those of the central government in respect of contribution to the NPS. Currently, 14 per cent (of basic and DA) contribution by the Central government to the NPS is tax-free, while it is so for 10 per cent contribution by state governments and companies.

The pension regulator also wants income from the NPS in annuities to be tax-free. Currently, 60 per cent of NPS money at the time of maturity is tax-free. The remaining 40 per cent is also tax-free if invested in annuities.

However, income from annuities is taxable at the tax rate in which the assessee’s income falls.

“The regulator has suggested to the finance ministry to make annuities income tax-free because this is the only source of income of many retired people,” said a regulatory source privy to the demand.

As North Block hopes to give wing to its fledgling international finance service centre (IFSC) in Gujarat, its new authority is batting for relaxation in terms of increasing the threshold for NRIs willing to invest in GIFT City.

Currently, NRIs who are not tax-president in India can invest in India-focused offshore funds through the foreign portfolio investment route. The maximum cap of NRI investment through the route varies between 24 per cent and 49 per cent of the paid-up capital, depending on the sector.

Besides, the IFSC also wants Indians to be allowed to use the liberalised remittance scheme to invest in GIFT City. Also, banks in the IFSC should have the flexibility to give loans to entities abroad in rupees.

Currently, an Indian can spend $250,000 a year to buy stocks, and invest in the spot market and assets abroad. However, the Reserve Bank of India (RBI) is learnt to be not in favour of the proposal because it fears this could lead to round-tripping and other illicit activities in the market.

In the FY20 Budget, the government had announced a 100 per cent tax holiday for 10 years, no dividend distribution tax from current and accumulated profits, long-term capital gains exemptions to Alternative Investment Funds (AIFs) for international financial services centre-listed securities, exemption from withholding tax on interest paid on debt securities issued in GIFT, and exemption for mutual funds set up in GIFT City. With these moves, GIFT City now has the potential to emerge as an important international financial services centre in Asia. Incentives to investors are much better than in established centres such as Mauritius.

The IFSC Authority (IFSCA), which came into effect in April last year, has been working closely with all other regulators including the RBI and Securities and Exchange Board of India to streamline the process.

The IFSCA has initiated measures including setting up an international bullion exchange, building an ecosystem for aircraft leasing, and positioning the centre as a Fintech hub.

Siddharth Srivastava, partner, Khaitan & Co, said: “Besides easing the foreign direct investment policy to attract foreign investment and taking action to enhance the attractiveness of foreign investment in India, measures are required to make the economic system friendlier and supportive for the foreign-invested movement towards an eased regulatory environment and robust recovery mechanism would generate confidence amongst foreign investors.”