Budget 2015: National Pension System tipped to improve and enlarge retirement savings, says Dhirendra Kumar

Finance Minister Arun Jaitley’s first full Budget is a simple one, conceptually. It has none of the big bangs that some people were looking for. Instead, it focused on the government’s priorities of fiscal management while finding a surprising amount of money for infrastructure. Just as interesting was the inauguration of a realistic social safety net. The mass insurance and pension schemes, along with subsidy delivery in cash through the JDY and Aadhaar system, will be a bigger bang in the future than any one-day wonder that could have grabbed the headlines today.

There is no specific measure that affects mutual fund investments, except those relating to their consolidation. So far, when a mutual fund is merged with another, investors of the merged funds are deemed to have sold units of that fund and acquired the other from the taxation point of view. This leads to an unfair and unjust tax liability. This has now been done away with. In such a merger, the investor will not have to pay any taxes.

Of greater long-term impact is something else.This budget starts a shift that should have happened years ago, which is the move from EPF to the National Pension System. So far, the government employees pensions have been managed in a modern system by private investment managers ( NPS), while private employees’ retirement savings have been managed by the EPFO,which doesn’t have customers. Instead, it has hostages.

For long, it has been obvious that the NPS was the perfect replacement for the EPFO. Now, private employees will have the option of using the NPS, instead of the EPFO. While there may be some devil in the details, the bringing of NPS centerstage has the potential to improve and enlarge the retirement savings of a huge number of Indians. Coupled with this, the enhancement of tax saving limits for the NPS means a new deal for retirement savings for employees of private firms.

Firstly, the deduction limit for contribution to a pension fund and the NPS is raised from Rs 1 lakh to Rs 1.5 lakh. There is also an enhanced deduction of Rs 50,000 for contribution to the NPS under section 80CCD. This means a higher tax-free limit, including that on the employers’ contribution to the NPS. More important is the facilitation of the shift from the EPFO to the NPS. All in all, this is a budget whose heart is in details, rather than details. That’s the best thing possible.