The government is likely to re-work tax benefits to make investments in pension funds more attractive for private sector employees. At present, only central government employees can claim tax deductions under a new pension scheme announced in the 2004 Budget.

Even though private sector employees can volunteer to be part of this scheme, their contributions are not eligible for any tax deduction.

Officials told Business Standard the finance ministry was actively considering the Vijay Kelkar task force recommendations to ensure a stable tax regime for long-term savings like pension.

At the same time, some benefits like the deduction on interest income under Section 80 L and tax rebate allowed under Section 88 for investment in specified schemes and instruments can be reworked, the officials said.

The new scheme will specify permissible investments to be included in various schemes and instruments, which are, at present, eligible for tax benefit under Section 10 and Section 88.

Alternatively, the new scheme can increase the maximum limit of investment in pension funds eligible for tax deduction either by increasing the limits under Section 80CCC or by providing a single comprehensive limit for all long-term investments.

The Kelkar task force had recommended an overall ceiling of Rs 100,000 without individual sub-limits.

Taxing investments in new policies will be through the "exempt exempt taxed" (EET) method by which only withdrawals are taxed while contributions and accumulations are exempted. The finance ministry has already indicated that investments under the Pension Funds Regulatory & Development Authority will follow the EET principle.

The Kelkar task force had suggested a new scheme called the Individual Savings Accounts, which will have two parts.

While the mandatory pensions will flow into tier I that will not be allowed to be withdrawn until the contributor attains the age of 60, all other contributions, which can be withdrawn at any time, will flow into tier II.