The 7th Central Pay Commission has recommended that the National Pension System (NPS), the regime which covers central government employees who joined service since 2004, be treated on a par with other long-term savings schemes for tax purposes. It has also made recommendations to improve transparency, accelerate implementation and establish dispute resolution mechanisms.
The pay panel said it felt that tax neutrality should be ensured across various avenues for long-term savings for post-retirement incomes so that the employees covered by the NPS are not at a disadvantage.
"The Pay Commission, therefore, recommends that withdrawals under the NPS should be tax-exempt to place NPS on a par with other pension schemes. The Pay Commission also recommends that the service tax levied at the time of annuity purchase by NPS subscribers should be exempted," the pay panel headed by Justice A K Mathur said in its report.
The NPS is under the Exempt-Exempt-Tax (EET) regime, while the General Provident Fund under the OPS is under Exempt-Exempt-Exempt (EEE) dispensation. Under the NPS, while the contributions and the accumulations are tax-exempt, withdrawals are taxable. As such, this is an inferior tax treatment, when compared to other pension programmes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund wherein contributions, accumulations and withdrawals are tax-exempt.
The pay panel also batted for higher transparency in the system. Many associations and individuals have complained that the information relating to the NPS is inadequate, resulting in high degree of uncertainty in the minds of contributors about post-retirement benefits.