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| Capitalstars Investment Advisor |
Retirement is not the same anymore. Not saving enough while there's time could leave you to a dreadful fate.
Employment trends indicate that during their working life, individuals will increasingly have multiple jobs interspersed with periods of self-employment and voluntary or involuntary separation from the job market. Life-long employment with the same employer is losing relevance as the nature of jobs and job security is changing. Increasing female participation in the organized workforce is crucial for increasing the growth and efficiency of the economy. Therefore it is imperative to promote her long-term savings for the period where she may choose to be outside the workforce for reasons such as to bring up a family.
Life expectancy beyond working life is also on the rise. There is a rapid increase in retirees who will need to sustain their post-retirement savings over a longer period of life expectancy. The old-age dependency ratio (i.e., the ratio of population aged 65+ years per 100 population 20-64 years) has increased substantially. It will be increasingly difficult for children to look after and support parents over their extended life expectancy.
So the goal of public policy should be to promote tax-sheltered savings instruments that are flexibly tailored to the new working life and to take care of life after retirement.
We therefore, need to address specific savings behaviour which promotes (a) savings for working life exigencies and (b) savings for retirement. The primary mode of savings for major working life exigencies and for retirement are insurance schemes and pension funds with contributions by both the employer and the employee. There is unanimity in views that tax incentives can be gainfully employed to promote savings in such funds. The income-tax incentives for these funds can apply at the different stages of contribution, accretion, and withdrawal from the fund:
* The income of the fund (as an entity) can be exempted from income tax
* The contribution made by the employer to the employee's account in the fund can be allowed as a deduction for computing income-tax liability
* The contribution made by the employer to the employee's account can be excluded from the employee's income for computing the employees' income tax liability
* The contribution made by the employee can be deducted from the employee's income while computing the employee's income tax liability
* The annual accretion to the employee's account in the fund can be excluded from the employee's income for computing the employee's income tax liability
* The withdrawal by the employee of his accumulated corpus from the fund on retirement (or on a specified work-life exigency) can be excluded from the employee's income for computing income-tax liability.
*The extent of the tax incentive at all the above stages can be total or partial.
The major financial instruments available in India for such long-term savings are the Employees' Provident Fund (EPF) for those in the non-government, formal sector. For government employees, it is the National Pension Scheme (NPS) Tier I Account. Both schemes envisage contributions from employer and employee and have significant tax incentives attached to them. However, these schemes (and the associated tax incentives) do not fully address the savings needs of individuals who are self-employed or who may be temporarily out of the workforce.
The NPS Tier II account run by the Pension Fund Regulatory and Development Authority (PFRDA) under a statutory law along with its attendant ecosystem of a single identifier and cross-country service providers, could, with modifications, be an ideal instrument for long-term savings for all individuals, especially those who may not be part of the organised workforce. We suggest a taxed-exempt-exempt (TEE) mode with modified withdrawal norms for a revamped NPS Modified Tier II Account which would help address the savings profile of the workforce of the 21st century. "An 'NPS Modified Tier II Account' in the TEE mode available to all taxpayers with the following contribution rules and tax treatment:
*Contributions to the account will not get any tax deduction or benefit annual income accrued and accumulated in the account will not be taxed
*The subscriber can withdraw his principal contributions (but not the income which has accrued in the account) without any taxation
*The subscriber can withdraw his entire accumulated balance without any taxation if he is 60 years or older and he has had the account for 5 years or longer
*Besides this, for specific life emergencies and exigencies such as disablement, etc. the subscriber can also withdraw his entire accumulated balance without any taxation even if he is less than 60 years old, subject to his having held the account for at least 5 years.
*The EPF, NPS Tier I and the 'NPS Modified Tier II Account' (with attendant income tax incentives) would help cater to individual savings, keeping in mind the different employment situations an individual taxpayer might encounter in his working life. This would help in the public policy goal of promoting long-term savings by individuals in a changing work-life environment.
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