A defined contribution pension scheme under the New Pension Scheme (NPS) for Central government employees,
who have joined service after April 1, 2004, is compulsory. It went
operational in 2008-09. The NPS structure implemented in India is very
investor friendly. The investment options offer adequate flexibility. A
subscriber can invest into government security (up to 100 per cent) or
corporate bonds (up to 100 per cent) and equity up to 50 per cent (only
Nifty or Sensex). The Pension Fund Regulatory and Development Authority ( PFRDA)
regularly monitors the performance to prevent risky investments. The
process for withdrawal on retirement at 60 years of age is
‘market-proof’ as it gives the option to withdraw in lump sum or on
deferred basis over 10 years. The total cost of administration of the
pension account from the subscriber’s perspective is among the cheapest
in the world. But these virtues are largely unknown to the public.
Since 2009, over three million pension accounts have been opened with
total accumulated pension wealth of around Rs 21,000 crore. Out of
this, the pension wealth accumulated under the voluntary scheme is less
than Rs 150 crore (about 60,000 accounts) vis-a-vis pension wealth of
government employees of Rs 20,850 crore. Clearly, policy initiatives are
required for encouraging voluntary subscription.
PFRDA appointed the Committee to Review Implementation of Informal Sector Pension ( CRIISP)
to review the implementation of NPS. The committee identified that
under the unbundled structure, no intermediary owns up the
responsibility for marketing. While the committee examined the role of
all intermediaries in the structure, it did not examine the role of
government as a stake holder. As the pension wealth accumulation grows,
government can seek funds from pension funds for infrastructure
development and social sector planned expenditure. The success of NPS
will partially relieve the government’s social security burden.
There is also a need to raise the awareness about the tax benefits of
the scheme for employers, HR professionals and employees to motivate
them to participate in it.
PFRDA introduced the ‘NPS for corporates’ scheme under which the
corporate is the nodal point to offer NPS facility and will be
responsible for collection of subscriptions as part of salary
administration. The Income Tax Act
allows 100 per cent of employer’s contribution to employees’ pension
fund under NPS subject to a maximum of 10 per cent of salary of
employees. A mere reallocation from the ‘cost to the company’ towards
contribution to the pension scheme helps employees get substantial tax
benefits plus systematic retirement savings.
The pension wealth accumulated under NPS will be available for
withdrawal only at the age of 60 years, unlike other types of long-term
savings. The government may create tax incentives around this USP of
assured accumulation of pension wealth and attract them towards
systematic pension savings. There is a need for offering exclusive
additional deduction besides the current 80 CC options to encourage wage earners to participate in the NPS.
An awareness campaign on old-age financial security and NPS needs to
be taken up, as today’s demographic dividend will become a demographic
burden 20 years later
Source: business-standard.com
writer: V R Narasimhan
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