New pension System Trust an introduction and tax related recent amendments.

[C.A. DEV KUMAR KOTHARI]

New Pension System:

New Pension System is India's simplest and perhaps the least cost pension system.

New Pension System (NPS) has been introduced by the Central Government on 01 January 2004, and is being regulated by Pension Fund Regulatory and Development Authority (PFRDA).

With effect from 1st May 2009, New Pension System has been extended to all citizens of India on a voluntary basis. NRIs can also apply.

The salient features of the New Pension System (NPS) are as follows :

It is a pension system for the non-Government sector.

It is open to anyone from 18 years to 55 years of age, including NRIs.

The minimum contribution is Rs. 6,000 per year, at Rs. 500 per transaction.

There should be a minimum of four transactions per year.

There is no maximum contribution. The maximum contribution in cash (at ICICI Bank) is Rs. 25,000 per transaction.

A subscriber must compulsorily select a pension fund manager (PFM).

The following six fund managers have been appointed, for subscribers to choose from:

1. ICICI Prudential Life Insurance Company Limited.
2. IDFC Asset Management Asset Management Company Limited.
3. Kotak Mahindra Asset Management Company Limited.
4. Reliance Capital Asset Management Company Limited.
5. SBI Pension Funds Limited.
6. UTI Retirement Solutions Limited.

A subscriber must choose between active choice and auto-choice for distribution of his contribution.

If active choice is selected, the subscriber must indicate the percentage distribution between corporate, gilt and equity.

The maximum investment allowed in equity is 50%.

Market-driven returns.

Contributions to be made till the age of 60 years.

Pension to start at the age of 60 years.

For example ICICI Bank with 49 branches is a Point of Presence (POP) for the NEW PENSION SYSTEM launched on May 1, 2009 by the Government of India. The scheme, promoted by the PFRDA (Pension Fund Regulatory and Development Authority, Government of India), is a first of its kind in India and is being launched pan-India by 22 other POP's as well.

The purpose of this pension scheme is to promote security of income to its subscribers in their old age. The scheme will empower a subscriber to plan his own retirement and pension. It not only will help him save for life after retirement but also is a good investment tool as the returns are market-driven. For optimum returns, the Government has appointed six fund managers for subscribers to choose from.

For more details and offer about NPS readers may visit the following link

http://www.indiacorporateadvisor.com/pdf/newpensionsystem.pdf

Amendments in tax laws:

Vide the Finance (No.2) Act, 2009 some amendments have been made in the Income-tax Act, 1961 in relation to the New pension System Trust. Section 10 has been amended to insert a new clause (44A) to provide for exemption of its income. The effectively the provision for exemption read as follows:

CHAPTER III

INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

XXX

 (44) any income received by any person for, or on behalf of, the New Pension System Trust established on the 27th day of February, 2008 under the provisions of the Indian Trusts Act, 1882 (2 of 1882.

The scope of the exemption :

The exemption is to all type of income.

The exemption is available to the New Pension System Trust or any person receiving any income on behalf of the New Pension System Trust which was established on 27^th Day of February,2008.

The exemption is from 01.04.09 that means for the income earned during the previous year beginning on 01.04.2008 and ending on 31.03.2009. which would have otherwise been taxable for the assessment year 2009-10 .

No exemption for Assessment Year 2008-09:

As can be seen from the clause (44) of S. 10, the New Pension System Trust was established on 27^th February 2008. Therefore the first previous year ended on 31.03.2008 relevant to assessment year  2008-09. The exemption is allowed w.e.f. 01.04.2009 only that is from assessment year 2009-10. Therefore, any income earned for the previous year ended 31.03.2008 will be taxable.  The New Pension System was launched during May 2009. However, there can be some income on the initial corpus funds received by the Trust in earlier year.

Exemption from Security Transaction Tax:

Chapter VII of the Finance (No.2) Act, 2004  which relates to levy, collection and administration of STT is being amended by insertion of a new section 113A vide Finance (No. 2) Act, 2009 with effect from the 1st day of October, 2009. The section reads as follows:

113A. Notwithstanding anything contained in this Chapter, the provisions of this Chapter shall not apply to taxable securities transactions entered into by any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10 of the Income-tax Act, 1961 (43 of 1961).

Thus STT is also being exempted for any taxable transactions entered into by or on behalf of the New Pension System Trust. This exemption is  w.e.f. 01.10.2009.

 Therefore, any recognized stock exchange, and mutual fund who are liable to collect and pay STT will have to keep separate records in respect of transactions entered into by or on behalf of the New Pension System Trust. Similarly share and security brokers will also have to keep separate record for such transactions. Software of stock exchanges, mutual funds and brokers will also require changes to provide for exempted transactions.

STT similar exemption is also desirable for other similar funds:

Gratuity Funds, provident Funds, and Superannuation Funds are also  established for similar purposes. These funds may  be / are also permitted to invest some money in some securities and units of mutual funds which attract STT. Therefore, it is desirable that exemption from STT should be allowed to them also.

Some related news:

The government today gave a booster dose to to its recently introduced pension system for all citizens to make it more acceptable.

The New Pension System introduced this May has received only a lukewarm respose so far. In the budget tabled in parliament, the government said pension trusts will not have to pay Securities Transaction Tax (STT) if they invest in the securities markets.

It also said the interim pension regulator will get Rs 8 crore to run an advertising campaign to familiarize people about the scheme.

The budget said that self-employed persons subscribing to the NPS would be subjected to tax only at the time of withdrawal.

Other subscribers are already under this kind of tax treatment.

The budget also proposed to exempt the income of the pension trust from income tax and also the donor of dividend to the trust from dividend distribution tax.

All purchase and sale of equity shares and derivatives by the NPS trust will be exempt from the securities transaction tax, Finance Minister Pranab Mukherjee said in his Budget speech.

From May one this year, the interim pension regulator, Pension Fund Regulatory and Development Authority (PFRDA) extended the NPS to all citizens. But the new scheme did not attract a good response. It has collected just Rs 80 lakh in the first two months of its launch.

Hopes and Conclusions:

In view of advertisements being planned it is likely that the NPS Trust and its schemes will become popular in near future.

Tax incentives granted to NPS Trust are likely to encourage people to invest in NPS Trust for their old age benefits.