Photo: Pixabay
Photo: Pixabay

The New Pension Scheme (NPS) was started in 2004 for government employees joining its ranks from that year as it found the existing dispensation defined benefit plan burdensome. NPS, on the other hand, is a defined contribution plan-no free lunch. The earlier pension scheme burnt a huge hole in government pockets.

Under NPS, however, a member gets returns and annuities in proportion to his investments by and large. In 2009, it was thrown open to any one -- government or non-government employee or even self-employed persons. Now, any Indian citizen aged 18 to 60 can join NPS.

For people of the country, NPS is a godsend what with there being no post-working life income available by and large except in the organized sector. That leaves 85 percent of the working population vulnerable and devoid of income support in their sunset years and hence rendering them dependant on their wards. Provident fund and gratuity serve but a limited purpose.

NPS investment: How it works

The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. You can allocate a maximum of 50 percent of your investment to equities. There are two options to invest--auto choice or active choice. The auto choice decides the risk profile of your investments as per your age. For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide the scheme and to split your investments. This is one area where NPS is not cast in stone.

A minimum of Rs 6,000 per annum is required to be contributed to one’s tier 1 account which cannot be hollowed out whereas no such minimum is prescribed for tier II which one can withdraw any time. On retirement, subscribers can withdraw a part (60 percent) of the corpus in a lump sum which is fully tax-free and use the remaining corpus to buy an annuity to secure a regular income after retirement.

The second leg of the requirement, i.e. 40 percent of the corpus being mandatorily annuitized as come for some criticism as it is a one-size-fits all approach though well meaning. Critics say a person may not need the crutch of regular annuity, but may need a lumpsum, for instance, to marry off his daughter or educate his son or to buy a house. The government should not be sitting in judgement over one’s perceived needs is their point. The government’s refrain is with longevity increasing, everyone must have a regular monthly income during his sunset years. Both arguments are compelling.

Another rigidity bedeviling the NPS is its peremptory rule that penalizes quitting it before the age of 60. Then, 80 percent of the corpus must be annuitized. In a people-centric scheme, investment avenues must not be cast in stone but instead provide flexibility. A person may take voluntary retirement at the age of 50 and want to start a business. Why should he be allowed the limited luxury of being able to get only 20 percent of his corpus as lumpsum?

Who manages the money

The money invested in NPS is managed by PFRDA-registered Pension Fund Managers. At the moment, there are eight pension fund managers: ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI NSE -0.55 percent Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company, and DSP BlackRock Pension Fund Managers. In other words, NPS like mutual fund investments is managed by experts.

The employer’s contribution to NPS is exempted under Section 80CCD (2).
Moreover, individuals can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B), which is in addition to Rs 1.5 lakh permitted under Section 80C. On maturity, it is tax-exempt at par with provident fund insofar as withdrawable part of 60 percent is concerned. Annuities received out of the remaining 40 percent accumulations of course are taxable like any pension scheme.

Why NPS has few takers

NPS hasn’t taken off with a bang and even 12 years after universalizing it, it has not caught the fancy of the people as was expected. After 11 years, it had only 12.7 lakh voluntary subscribers.

Apart from the rigidities with which the scheme is pockmarked, it is also a victim of cannibalization---the government had a couple of years ago launched three pension schemes: Pradhan Mantri Shram-Yogi Maandhan (PMSYM), which is meant for unorganised sector workers; Pradhan Mantri Karam Yogi Maandhan Scheme (PMKYMS) for small traders; and one for the small and marginal farmers, with a guaranteed monthly pension of Rs 3,000 to the beneficiaries-- under both the schemes upon attaining the age of 60. Only in the pension scheme, the government’s target was to enroll five crore farmers in three years.

The government makes matching contribution in these three schemes. The availability of too many pension schemes is also a spoiler for the NPS and makes its marketing difficult even if it is the cheapest scheme run in the most transparent way possible. Add to this, the middle class penchant for pining for a government guarantee and the catalogue of reasons for failure is complete.

NPS returns are determined by market and that perhaps disenchants people who are by and large risk-averse. EPFO swears by safety and doesn’t go beyond 5 percent equity investment, that too confined to the straight and narrow of index funds.

(The writer is a senior columnist and tweets @smurlidharan)

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