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Budget: A blow to pension schemes
Freny Patel in Mumbai
 
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March 04, 2005 09:40 IST

The Budget has dealt a big blow to the long-term security needs of individuals.

The superannuation fund  -- or the retirement fund many companies build up and give to the employee at the time of his retirement -- will now fall under the tax net as the finance ministry has decided to impose service tax on what it considers are 'fringe benefits'. Superannuation is among the many items that fall under the list of fringe benefits given to employees by the employer.

The full employer contribution under superannuation would be taxed at the rate of 10 per cent service tax. This might result in some corporate houses choosing not to offer this 'fringe' benefit, which is not compulsory, but helps individuals secure their lives post-retirement.

The finance minister P Chidambaram had in his Budget statement said that the country would move towards an EET regime (acronym for exempt, exempt, tax), which essentially means exemption at the time of contribution, exemption at the time of accumulation and taxation at the time of withdrawal.

With the government imposing service tax on superannuation contributions, it is actually moving to a TET model, said executives of the Insurance Council.

The council will take up the issue with the government, as it sees this having a larger impact on group insurance sales. Additionally, if you as an employee were enjoying benefits under group insurance and group medical welfare, you might see these benefits vanish come April 2005.

"The tax on fringe benefit seems not only complicated but very regressive and needs to be re-visited. It clearly affects the superannuation benefits, and we need to seek clarity on what constitutes 'group business' as well. We will try and persuade the finance minister to roll this back," said Venketesh Mysore, managing director, MetLife Insurance Company. Further, individual pension plans have also lost out in the Budget.

On the face of it, it might seem that an individual can now invest up to Rs 100,000 in any pension product.

However, if one were to read into the details of such plans, at the end of maturity of a pension plan, the policyholder needs to buy annuity, and can withdraw only to the extent of 33 per cent of the accumulated corpus.

Should he choose to withdraw the full amount, this again would be taxed at the then prevailing tax rates. In contrast, all other insurance products enjoy full tax exemption on redemption proceeds.

This is as per section 10 (10D), which continues to prevail for the time being. "All classes of insurance products but for pension products would be able to compete for the Rs 100,000 investment. Pension plans would need to be repositioned," said Shikha Sharma, CEO ICICI [Get Quote] Prudential Life.

Today the common tax payee is entitled to tax exemption up to Rs 100,000, which will be directly deducted from the gross income of the individual. Where individual pension plans had no competition and an individual would get a direct tax benefit of Rs 10,000 under section 80CCC of the Income Tax Act, today, the investment would need to compete with a host of other products.

An individual may now invest up to Rs 100,000 in a pension plan, but at the time of maturity when he retires, he would be forced to buy an annuity product.

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