National Pension System has miles to go before it succeeds
A couple of years ago, Gurgaon-based advertising professional Shalini Rajani quit her job to start her own cooking business called Crazy Kadchi. But she wanted to continue saving regularly for her retirement, just like the provident fund when she was employed. When she found out about the National Pension System (NPS), she approached her bank to open an account. "I inquired with my banker about the NPS. Instead of telling me about the NPS he started telling me about other products. As I was not interested in other products I did not follow up," she says.
Rajani's is not an isolated case and this lack or zeal to open NPS accounts is not confi ned to only one bank. When this writer visited an ICICI Bank branch near her residence in east Delhi, she was told to go to the Connaught Place branch in central Delhi, about 20 km away. She then visited a number of other bank branches in the vicinity - UCO Bank, Syndicate Bank, Axis Bank, State Bank of India, IDBI Bank, Central Bank of India and State Bank of Travancore - but either the bank staff was unaware of the product or told her the facility was not available in that particular branch. Eventually, the writer visited an SBI branch in central Delhi where she was told she could open an NPS account.
No wonder, then, the NPS has attracted only 84,485 people (under the retail scheme) six years after it was launched with much fanfare in 2009. The scheme was expected to sell itself riding on its low-cost structure, but it has failed to reach out to the masses. The number of NPS subscribers may look high if we include the Swavalamban account holders (38 lakh). The Swavalamban scheme was launched by the government in 2010/11 for the poor and unorganised sector workers. Under the scheme, the government contributes Rs 1,000 each year to every account holder. But in terms of value it is still miniscule at around Rs 2,000 crore, which is just three per cent of the total corpus. Most of the corpus is from Central and state government employees, for whom NPS subscription is mandatory.
The NPS is a low-cost, tax-efficient retirement savings product. Its fund management charges are as low as 0.01 per cent - much lower than mutual funds. You need to contribute regularly so that at the age of 60 you have a sufficient corpus to retire. It offers two investment options - active choice or auto choice. In active choice, you can invest your money across three fund options: equity, in which up to 50 per cent can be invested in equities; fi xed-income instruments other than government securities; and government securities. In auto choice, funds are invested in a predefi ned ratio. The purpose is to give stability to investments as you move towards retirement. It also offers two account types - Tier I and Tier II. While investment in Tier I account is compulsory, Tier II is optional and allows withdrawals.
"The NPS is a great product for retirement planning, especially given the fact that it has the lowest cost. A drawback is that one can invest a maximum of 50 per cent in equity. This is disadvantageous for young people who wish to enroll for the NPS. Also, the skew towards debt slowly grows with the age of the investor," says Manish Jain, a certifi ed fi nancial planner and founder of Knowledge Partners.
The corpus is managed by several fund managers, including HDFC Pension Management, ICICI Prudential Pension Fund Management, Kotak Mahindra Pension Fund, LIC Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds, and UTI Retirement Solutions. You can open an account online through ICICIDirect or CAMS Online. But you might need to submit documents at a branch even after fi lling the form online. The website of the sector regulator Pension Fund Regulatory and Development Authority (PFRDA) says almost all banks (both private and public sector) are enrolled to act as Points of Presence. But not all bank branches open an NPS account. Several fi nancial institutions such as Alankit and Bajaj Capital are also authorised to open an account.
TAX BENEFITS AND RETURNS
Finance Minister Arun Jaitley, in the Union Budget 2015/16 in February, announced a separate tax deduction of Rs 50,000 for the NPS over and above the Section 80C limit of Rs 1.5 lakh. You now also have an option to choose between the Employee Provident Fund (EPF) and the NPS for making provident fund contribution from your salary. This means contribution to the EPF will no longer be mandatory. There are other tax benefi ts as well. For example, you can claim deduction for your employer's contribution (up to 10 per cent of salary), which is over and above Section 80C deduction.
The equity scheme of the NPS has given 42 per cent returns against an average return of 29 per cent by the safer balanced mutual funds (where equity exposure is between 25 and 60 per cent) over a one-year period, as of February 27. Scheme G, which invests in government securities, has given an average return of 22 per cent against 17 per cent by gilt funds during the same period. Scheme C, which invests in fi xedincome instruments other than government securities, offered 16 per cent returns.
There are, however, a few limitations in the NPS. For example: since it is a retirement-focused scheme, it does not allow complete withdrawal even at the age of 60. You can withdraw only 60 per cent money at the age of 60. The remaining has to be used to buy annuity. In case of early exit, only 20 per cent is paid while 80 per cent is retained to pay you pension after 60. Tax on withdrawal is another concern. Unlike the public provident fund, which is entirely taxfree, the maturity amount as also pension are taxable under the NPS.
But the main factor responsible for the NPS remaining a nonstarter is the lack of interest in the product among distributors due to low commissions. Hemant G. Contractor, PFRDA Chairman, admits distribution is a problem. "We are looking at the compensation structure. We will modify it slightly to make it attractive." Currently, a distributor earns 25 paisa on every Rs 100 invested in the NPS. This means for every Rs 1 lakh he gets just Rs 250 as commission. The number clearly explains why the NPS has been struggling to reach out to the masses.
Still, the NPS is a great retirement tool. Open one to ensure smooth sailing after retirement.
