Recently PFRDA made proposal to Finance Ministry to exempt NPS withdrawal from tax. If NPS withdrawals are exempted from tax then the scheme has the potential to become the cynosure of voluntary investors. 7th Pay Commission headed by A K Mathur has also recommended giving EEE (Exempt - Exempt - Exempt) status to NPS and bringing it at par with EPF.
The contributions to NPS, which was started in 2004, and returns on them are tax exempted, but withdrawals attract tax. This has withered away potential investors. Apart from this there are other issues like less awareness about the pension products, low levels incomes and resulting low investment and saving capacity, low commission/fee for distributors and inability to reach the untapped sector constituting mainly of unorganized sector.
Out of Indian labour force of 48 cr. only 6 cr have access to any kind of pension cover and according to a recent report released by Crisil ratings agency, only 8% of employees who retire from the private sector in India are covered by pensions. All these data point to the challenge present in front of policy makers and opportunities available in form of untapped market for pension product providers.
Recent Initiatives to improve attractiveness:
Recently a number of steps have been taken to make NPS more attractive. Giving statutory status to PFRDA in 2014, use of digital technology in registration, making contributions and exiting from the scheme has made the whole process hassle free. In 2015-16 Budget additional tax deductions of Rs. 50,000 for investment in NPS were given. With change in the market situation and need for investment in infrastructure in India, permissions to invest in REITs (Real Estate Infrastructure Trust), INVIT (Infrastructure Investment Trust), IDFs (Infrastructure Debt Funds) have been given.
Apart from these steps the decision of active management of NPS assets is a challenging one. It gives the Fund Managers option to invest in stocks. This can bring huge returns at the same time puts them to both market risk and fund manager risk. Earlier only passive management was allowed. In passive management of funds, the investment is made only in market indexed funds. This puts them only to market based risks avoiding fund manager risk.
What else needs to be done:
In spite of these steps the penetration of NPS remains low with only 1 cr. subscribers. To improve this a number of steps should be taken. Some of them are:
• Give private fund managers permission to manage government employee's contribution. This will increase private player assets under management and give them more leeway in making investments in high return but more risky options.
• Give employees option to choose their fund manager.
• Rationalize the fee charged by Pension Fund Managers to make the field more attractive. G. N. Bajpai committee recommended that the fee should have a fixed component and variable component at place of present fixed component determined by lowest bidder.
Pension products in India
• Savings -cum- tax savings instrument started in 2004
• Defined contribution based scheme
• Open to all in 18-60 age group and compulsory for central Government employees.
• Started in 1952 and managed by EPFO
• Compulsory for Government employees
• Has 3 components Provident Fund, Insurance and Pension
• Fixed interest rates decided by EPFO.
• Tax exemptions at deposit, interest and withdrawal stage.
• Compulsory contribution from employer for salaried employee with salary below 15000.
• Open to salaried employees only
• Savings -cum- tax savings instrument started in 1968
• Open to all and initial duration of 15 years which can be extended and maximum deposits of Rs. 1,50,000 in a year.
• Interest rate determined by government
• Loan can be taken on deposits and multiple options at the time of maturity either to continue of withdraw.
• Started in 2015
• Open to all in the age group of 18-40 years
• Age of start of pension 60 yrs.
• Fixed pension depending on contribution in the multiples of Rs 1000 and upto maximum of Rs 5000.Other Pensions products sold by insurance companies and mutual funds.