That extra mile

The Centre’s attempt to promote the National Pension System is well thought and can pay rich dividends. All stakeholders will benefit if the scheme expands its reach. The pension liability on the exchequer will reduce with new government employees subscribing to the NPS, money invested in the scheme can be deployed to fund the capital expansion of companies, and small investors can invest in a retirement product with market-linked returns. The scheme is particularly beneficial to employees in the private sector, without government-funded social security cover.

The popularity of the NPS among Indian investors is reflected in the rapid increase in assets, that currently stand at ₹80,800 crore. The bulk of this has flowed in after the scheme was opened to the public. The flexibility of investing up to 50 per cent of the corpus in equity has been welcomed by those unhappy with the narrow investment mandate of the Employees’ Provident Fund. The fund managers of the NPS have delivered returns that are far superior to existing pension products and have also managed to outperform both equity and debt benchmarks easily. The Centre’s recent move to allow tax exemption on NPS investments up to ₹2 lakh under sections 80C and 80CCD is a good idea; it is already generating interest from new investors, leading to the opening of new NPS accounts. Other recent tweaks such as allowing investors to withdraw up to 25 per cent of the sum contributed after 10 years and allowing annuity to be deferred by three years when investors turn 60 will also help make the NPS more attractive.

That said, the scheme retains some rough edges. The most obvious is unfavourable tax treatment. The investment in NPS is taxable at the time of withdrawal. Exempting the amount from tax at the time of redemption will place the NPS at par with the Public Provident Fund and the Employees’ Provident Fund. It is ironical that while equity investments held for more than a year are exempt from tax and debt investments held for more than three years enjoy indexation benefits, a product that seeks to secure the pension needs of the country suffers, although it also invests in equity and debt. If the Centre is really serious about extending the reach of this socially significant scheme, the anomaly in taxation has to be addressed, and quickly. The lack of a proper annuity market also needs to be tackled soon, as 40 per cent of the payout is in the form of a lifetime annuity. Finally, the government has to ensure that, like the Jan Dhan scheme, the NPS, too, becomes truly universal, covering all workers.

COMMENT NOW