Income tax payers of all stripes are known to grumble that they carry the weight of the nation on their shoulders and in return they get little. Rich taxpayers crib about infrastructure, urban chaos and the various surcharges on the super-rich. Those in the middle and lower groups also have similar cribs, but also wonder why they are paying tax, when so many people who should be paying taxes don’t. The sight of loan defaulters whose burden is ultimately borne by them adds to their frustration. For a different viewpoint, you may want to read Manas Chakravarty’s piece in the India@75 series: Who benefited the most from economic growth?
Some salt to taxpayers’ injuries was added this week when the government decided that the Atal Pension Yojana (APY), a scheme mainly targeting the unorganised class, will be closed to income taxpayers from October 1. These are defined as anyone who may have paid tax at any time or anybody who is liable to pay tax now.
The scheme was launched with a lot of fanfare in 2015 as a means to provide a defined pension benefit—ranging from Rs 1,000 to Rs 5,000 a month—depending on their contribution and age at enrolment, that they will get after the age of 60 years. The scheme is clearly targeted at the vulnerable population and public sector banks are the main intermediary, encouraging low income consumers who open Jan Dhan Yojana accounts to enrol in the APY as well.
What could be the reasons for the shift? The objective of this scheme was to provide steady retirement income for unorganised workers as part of the government’s effort to provide a wider social security net. The main charm of the scheme was the pension amount was guaranteed, essential to convince the target market to put in money. A defined contribution scheme such as the NPS would have led to people hesitating. But this meant the government had to provide a backstop to bridge the gap between the returns generated and the payouts.
The monthly payout involved is relatively small—considering you will get them decades after you start putting money in the scheme. It seems unlikely that rich tax payers were flocking to the scheme, as part of their retirement planning. As of September 2021, only 14 percent of the subscribers had opted for a pension of Rs 5,000 a month post-60, while 78 percent had opted for the lowest Rs 1,000 sum, with the rest opting for the amounts in between, according to a Financial Express report.On one hand, the scheme is working as intended, as the maximum enrolments are in the lowest tier. But the subsequent dip followed by a spike implies the Rs 5,000 enrolments may be from the wealthier class.
Even then, it’s a small number. Has there been a sudden shift since September? Given the fall in interest rates, even turning negative adjusted for retail inflation, have tax-paying savers decided to put a part of their savings in the APY? Or, does the government want to prevent this number ballooning in future and is hence putting this safeguard in place?
Only the government knows the answers, but the real problems lie elsewhere. Falling real returns for savers is one that we already talked about. A more important one is the state guaranteeing returns, which has always caused trouble at some point. This could have been avoided or an income cap prescribed at the beginning to make it clear who could enroll in the scheme.
Of course, the government can turn around and say taxpayers—who are not salaried—do have retirement saving options such as the PPF scheme and the NPS. But the tax-free cap of investing Rs 1.5 lakh in the PPF has not changed while the NPS does not offer a guaranteed return.
The government’s effort to limit unintended support to the wealthier class even if it pays tax was evident on another occasion, when it disallowed contributions of more than Rs 2.5 lakh a year from getting a tax exemption on the interest income on the excess contribution. This was to plug the ability of the rich to get tax-free returns from their employee provident fund, which are often higher than what the market pays. Again, the real problem here is that the EPF returns are not market-linked.
While there may not be many taxpayers who will bemoan the loss of an investment avenue such as the APY, the next time they talk about their contribution to nation-building but not getting much in return, they have an addition to the list.Investing insights from our research team
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