The New Year could see the introduction of a new pensions system in India that will offer retirement savers the option of tapping the high-risk-high-return equity markets. Stock market regulator Securities and Exchange Board of India (SEBI) will in its next board meeting in January take up a proposal to allow mutual fund companies to offer pension plans.
Highly placed official sources told The Hindu that if the SEBI board approved the proposal, it could then request the government to extend to these mutual funds-run pension plans the same tax breaks that were now available to retirement savings in the government-run National Pension Scheme (NPS). “The proposal is to extend to mutual funds-run pension plans the tax benefits now available under Section 80 CCD of the Income Tax Act to the NPS,” the sources said. This would need Parliament approval, said the sources.
Section 80 CCD allows employers to deduct from their taxable income the contributions made on behalf of their employees to the NPS. The contributions to NPS schemes by employees, too, are treated tax-free. The tax benefit is over and above the Rs.1 lakh tax-free savings Section 80C of the Income Tax Act allows to individuals.
Contributions to the proposed pension scheme will be discretionary, to begin with. The NPS is the mandatory pension scheme for government employees hired after May 1, 2004, though it is open to private individuals too. The NPS does not give government employees the option of investing more than 8 per cent of their retirement savings into equity markets. Private sector employers with more than 10 employees statutorily contribute on their behalf to the Employees’ Provident Fund Organisation (EPFO).
The difference between existing mutual fund schemes and the proposed pension plans will be that withdrawals will not be allowed before retirement unless in the case of specific exceptional circumstances.
According to the proposal, the pension plans will offer retirement savers flexi-choices on the mix of fixed income and equity investment options. The NPS offers savers only three options and the EPFO offers none at all. The wider investor reach of mutual fund companies, it is expected, will give retirement savings a big push.
“Retirement savers in India lost out on the stock-market rally between 2004 and 2009 as the NPS and the EPFO have denied them adequate opportunities for equity investments,” said the sources. “As the NPS does not have its own proper selling and distribution arm savers are unable to easily access its schemes.”
In August, Finance Minister P. Chidambaram had proposed that the EPFO and the NPS be merged to make them viable, a proposal that has not progressed. “India has one of the largest young populations in the world, but no viable pensions saving mechanism,” said the sources. “This ticking bomb of old-age poverty has been a worry for the government.”
At present, India does not have a universal social security system to protect its older population from economic deprivation.
