SAVING GRACE

New Delhi, Feb. 21: India’s salaried employees may retire with fatter pensions, if the country’s bank chiefs have their way.

They want the government to remove all caps on employers’ contributions to provident and pension funds as well as on gratuity payments. Employers are eligible for tax exemptions on these payments.

The bankers have met finance minister P. Chidambaram as part of a lobbying exercise with the Congress- led government.

If this is accepted , employees in all sectors can look forward to fatter pensions and retirement benefits in the years ahead. Employers can now contribute a maximum of 27 per cent of an employee’s basic salary to a pension or a provident fund and make a gratuity payment of up to 8.33 per cent of the basic salary, for tax exemption.

The influential and powerful Indian Banks’ Association, led by Canara Bank chief executive M.B.N. Rao, had the meeting with the finance minister to press for the hike in employer payments.

Banks who are part of the lobby include the State Bank of India, Punjab National Bank, ABN Amro, HDFC Bank and Standard Chartered Bank. Banks manage most of the approved provident, pension and gratuity funds and would naturally like to see the corpus of these funds grow bigger.

It can also be argued that with defined pension schemes coming into vogue and life expectancy going up, there is a need to contribute larger sums in funds to ensure an assured return over a longer period after retirement.

The life expectancy of Indians has gone up from 45 in 1962, when the income tax rules were framed, to 68.5 in 2007, the bankers said. The IBA’s note for the finance minister says “the rules appear to have been framed in the past keeping in mind defined contribution schemes rather than defined benefit (assured pension amount) schemes.”

Analysts say employers are unwilling to make provisions for employees unless they get tax exemptions on the provisions. They say the old income tax act comes in the way of raising the ceiling on contributions eligible for exemptions.

If exemptions were available, employees who seek to retain talent in industries where there is a skill crunch may be willing to not only make contributions but also create “handsome pension packages” for star employees.

However, KPMG analyst Ravi Trivedy said, “Worldwide the trend is employees contribute more than employers, and this may not be reversed in India alone.”

The rule change, if it happens, will impact not only the Employees’ Provident Fund Organisation (EPFO), the country's largest provident fund, but also several smaller approved provident and superannuation funds run by banks and asset managers on behalf of limited companies for their employees’ benefit.

The EPFO, which has more than 43 million subscribers, manages three schemes — Employees’ Provident Fund, Employees’ Pension Fund and Employees’ Deposit Linked Insurance Fund — with more than Rs 2,16,000 crore under management.