India’s National Pension System, exposed to the vagaries of the stock market and unable to help investors assess retirement income, fallsshort of worker expectations. The NPS should do more to meet a basic social security goal.

The National Pension System (NPS), which was opened up from May 2009 for all citizens to join on a voluntary basis, is considered a good option for retirement planning.

V. R. Narasimhan, Chief Executive Officer, Kotak Mahindra Pension Fund, says the pension saving scheme under the NPS model is the most economical and flexible for pension wealth accumulation. Kotak Mahindra Pension Fund is a pension fund manager appointed by the Pension Fund Regulatory and Development Authority (PFRDA) to manage the corpus under the scheme.

Ever since the NPS was made available for all citizens, its subscriber base has increased substantially. The response was good after the low-cost Swavalamban scheme was introduced, making it affordable to the weaker sections. The customised version of the core NPS, known as the NPS corporate sector model, launched in December 2011 has expanded its base. In the last two months, a significant addition to corpus has taken place. As on March 2, 2013, the subscriber base was 44.94 lakh, up from 42.17 lakh on January 5. On March 31 in the previous year, the total number of subscribers was 31 lakh, against 18.60 lakh in 2010-11.

The pension scheme has attracted workers in the unorganised and private sectors, providing a return of 11.55 per cent in 2011-12 under its corporate debt segment category (scheme-C). Risk-averse investors can opt for 100 per cent investment in government securities, Mr. Narasimhan says.

The corporate model has evoked a good response among public and private sector employees. With a rise in number of corporates subscribing to it and a significant increase in government employee enrolment, the corpus has grown to Rs. 28,493 crore as on March 2, 2013, from Rs.15,163 crore in 2011-12.

C. R. Chandrasekar, Founder and CEO, fundsindia.com (which markets NPS products), says the NPS is among the best  schemes available.  The transparency, low cost, participation in capital markets (though equity exposure is limited to 50 per cent), control in the hands of the investors, ability to switch fund types and fund managers make it attractive.  

The NPS works on a defined contribution basis with two tiers: Tier-I and Tier II. Under the defined contribution structure, subscribers can decide where the money can be invested. For a Tier-I account, both employer and employee can contribute equally. Employee contribution is mandatory, while employer’s is optional. Tier-I account does not allow any withdrawal before the age of 60 years.

The Tier-II account is a voluntary savings account, and it can be opened only if one has an active account. Tier-II account offers subscribers the option to withdraw their savings at any time. Any individual between 18-60 years can join the NPS. The retirement age for both Tier-I and Tier-II is 60 years.

Market-linked returns

The returns are market-linked, and there is no guarantee of assured returns. However, subscribers can invest in government securities for assured return.

D.K. Aggarwal, Chairman and Managing Director, SMC Investments and Advisors, says a positive factor is that the funds collected under the NPS can be invested (up to 50 per cent) in the stock market, and the overall return can be higher than that provided by provident funds. “There is resistance from labour unions as they fear investing in the stock market by the NPS can erode their capital. However, history suggests that investing in the stock market can provide much higher return over a long period, if it is well managed,” he says.

NPS fund management fee is fixed at 0.0102 per cent of the invested amount for government employees and 0.25 per cent for others. Other charges such as account opening, maintenance and transaction charges are nominal.

Jimmy A Patel, Chief Executive Officer, Quantum Asset Management, thinks the NPS products need to be promoted more. Investors get a chance to choose the fund manager and even the investment profile they would like based on their risk appetite.

Tax benefits

The contribution from employees to NPS Tier-I up to 10 per cent of basic and dearness allowance is tax exempt under Sec 80 CCD (i) with a ceiling of Rs. 1 lakh. From April 1, 2012, employer’s contribution up to 10 per cent of basic and DA to employee’s account is treated as business expenses and adjusted in the profit and loss account. The NPS now comes under the EET (exempt, exempt, tax) regime. Current laws state that the funds will be taxed on withdrawal and returns from annuity insurance plan after retirement will not be tax free.

The PFRDA will allow NPS investors to withdraw a lump sum at the time of exit, as against the current practice of annual ‘phased withdrawals.’

Subscribers can withdraw on attaining the age of 60 and up to 70 years from the pension system. At exit, subscribers must invest at least 40 per cent of pension wealth to purchase a life annuity from any IRDA-regulated life insurance company. The remaining pension wealth can either be withdrawn in a lump sum on attaining the age of 60 or in phases between age 60 and 70.

Any subscriber who desires to withdraw before 60 years of age is required to invest at least 80 per cent of the pension wealth in a life annuity from any IRDA-regulated life insurance company. The balance 20 per cent may be withdrawn as lump sum.

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