The Hindu Business Line : Self-employed and the NPS

The decision to allow self-employed professionals to contribute to the New Pension Scheme is good but the tax deduction limit has to be increased to make it attractive.

Governments are often accused of getting things wrong. But the problem is not so much that they make mistakes. It is that even when they do the right thing, they do it with so much pusillanimity that it appears as if they have messed up. The long overdue decision to allow self-employed professionals to contribute to the New Pension Scheme (NPS) falls squarely in this category. The idea is a solution to a problem that this class of income earners faces. This is that while they get a handsome deduction for business expenses — as much as 45 per cent — they have no above-the-board way of saving. This has led to two outcomes. One is to fake expenses because those who sell the output of their brains — doctors, lawyers, architects and such others — simply cannot incur the same level of expenses year after year as manufacturing units do. The other, because there are no tax incentives for savings, a lot of cash income is generated. The overall result is that the exchequer loses a lot of revenue. So allowing self-employed professionals to contribute to the NPS is a very sensible step, not least because in a service economy like ours, where there are so many self-employed, the need for this should have been blindingly obvious from the start.

Yet, as mentioned, a good idea can be throttled by lack of vision. Budget 2009’s proposal, even while saying that the self-employed can contribute to the NPS, has included these contributions under Section 80C. This section has an upper limit of Rs 1 lakh per year that can be claimed as a deduction. This is a derisive amount for someone seeking to transfer, in a legal way, a respectable portion of his or her income into financial instruments that yield a decent income in the future. The limit needs to be raised not just for self-employed professionals but for the salaried class as well. It is no argument that real estate and gold are always available as stores of value and as income generators. Of course they are — but a lot of cash income is needed for buying these things. Why not discourage this?

What needs to be done is to reduce the level of business expenses allowed to self-employed professionals from 45 per cent to 25 per cent, simultaneously permit contributions to the NPS without an upper limit but with a lower rate of interest (say 1 per cent below the WPI rate of inflation on January 1 of the year) and exempt withdrawals from tax. Alternatively, the limit could be pegged at Rs 10 lakh a year for receiving the normal rate of interest. This will bring in millions of self-employed professionals into the tax net, allow them to save without having to take under-the-table payments and boost the pension fund — from which the Government can borrow.

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