The Hindu Business Line : Enliven the New Pension Scheme

While the introduction of the New Pension Scheme by the Government is welcome, it lacks certain features which could hamper its attractiveness and, thereby, restrict its reach.

— Mohammed Yousuf

The New Pension Scheme should be brought on a par with PF/PPF as far as tax benefits are concerned.

Vikas Vasal

India does not have a comprehensive social security scheme. As a result, the common man is left to himself to provide for and secure his future, especially after retirement. Therefore, a vast majority face a big challenge in terms of pension, medical and other requirements in their old-age.

The current retirement fund schemes in India which, inter alia, include provident fund, gratuity and superannuation fund, are primarily limited to salaried individuals and mainly cover employees working in the organised sector.

Though every individual can contribute to the PPF and other small savings schemes, their reach and utility is quite limited. Therefore, there has always been a need for a good pension scheme, wherein all the individuals, whether salaried or self-employed, could park their savings on regular basis and derive benefit from it post-retirement. A welcome beginning has been made, with the Government introducing the New Pension Scheme (NPS). Now, every citizen of India, whether resident or non-resident, between 18 and 55 years of age is eligible to participate in the NPS.

Some of the key features of NPS that makes it attractive are:

The Government has appointed a regulator — Pension Fund Regulatory and Development Authority (PFRDA) — which shall monitor the functioning of the various agencies involved in the NPS. This would provide comfort and create confidence in the common man to invest in the scheme.

It is simple to operate, that is, through designated banks/other organisations, and provides online access to individuals to monitor their portfolios. This is a big advantage compared to the PF scheme, wherein an individual generally struggles to know the balance on a year-on-year basis and faces lot of hardship at the time of transfer from one employer to the other and from one city to the other. Besides, withdrawal of the funds from PF is a time consuming and tedious process.

The minimum contribution per year, at Rs 6,000, should be within reach of many people from a long-term savings perspective.

The overall threshold limit has been prescribed in respect of different classes of assets wherein an individual can make the investments. Therefore, in case of an individual who does not have knowledge or background to understand and take decision in respect of his financial investment, the scheme clearly comes to his rescue by defining the percentage of total investment which would be put under different asset classes — equity market, other instruments and government securities.

The transaction charges in the scheme have been kept at bare minimum, which would also encourage participation by small investors.

Currently, NPS is available only in the form of Tier I Accounts, wherein there is restriction in withdrawal subject to certain conditions. Therefore, it would ensure compulsive long-term savings and investment.

Areas needing attention

The NPS, however, lacks certain features which could hamper its attractiveness and, thereby, restrict its reach.

NPS follows the EET (Exempt, Exempt, Tax) model whereas the other retirement schemes such as PF and PPF follow the EEE (Exempt, Exempt, Exempt) model. From a long-term investment perspective if the individual has limited funds to make investment, then he may still prefer to invest in PF/PPF compared to NPS wherein income/receipts would be taxable subsequently. Therefore, NPS should be brought on a par with PF/PPF and covered under the EEE model.

An individual has an option to invest a specified percentage of his overall portfolio in equity schemes. If this portion of investment is compared to mutual funds, then NPS lags behind the mutual fund investments from the tax perspective. Investment made in equity based mutual funds and withdrawn by way of sale after 12 months do not attract capital gains, even though they attract a nominal levy in the form of Security Transaction Tax (STT), whereas the returns from NPS are taxable. Therefore, there is a need to look into this aspect.

Though every citizen, including salaried employee and self-employed, is eligible to participate in NPS, tax deduction under Section 80CCD of the Income-Tax Act, 1961 is available only to salaried employees. Therefore, this anomaly needs to be corrected by making necessary amendments and, thereby, providing relief to all individuals, including non-salaried employees.

It is mandatory for every employer to contribute to the PF scheme under the Employees’ Provident Fund Scheme, 1952. Keeping in view that both PF and NPS broadly aim to serve similar purpose and that the latter offers more transparency, an option should be given to the employees and the employers to opt for either of them. It is likely that once this option is given, a significant portion of contributions currently being made into PF may go into NPS.

A win-win scheme

Like any other long-term investment scheme, the NPS would also evolve over a period of time and become better and more attractive. At this stage, an immediate requirement is to provide some tax benefits to make it a more popular and investor-friendly.

Also, NPS would act as a large reservoir of savings available for relatively longer period of time, which could be used for infrastructure and other projects requiring a long gestation period. Hence, it could turn out to be a win-win situation for individuals, the corporate world, government and the economy as a whole.

(The author is Executive Director, KPMG.)

Related Stories:
Govt reviewing Employees’ Pension Fund Scheme, 1995
New Pension System : Is it an optimal retirement vehicle?

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