HOW DOES IT COMPARE WITH THE OLD ONE?
By V Subramanian
Important
Features
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Old
Pension Scheme
|
New
Pension Scheme
|
Intricacies
and Implications
|
Employee’s
Contribution
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On the aggregate of
Basic Pay, Special Pay and other allowances ranking for P.F, 10% has to be
contributed by the employee. This will be kept in the Individual’s P.F. account.
|
On the aggregate of
Basic Pay, Special Pay and other allowances ranking for P.F. and also Dearness Allowance, 10% has to be contributed by the employee.
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There will no longer
be any P.F. account. The take home pay of the employee will get reduced,
because of the additional amount deducted (10% on D.A.).
|
Bank’s
Contribution
|
Bank will contribute
an equal amount, matching the employee’s contribution. This will be kept in another account
separately and balances in this account will become the corpus fund to
service the future pension of the employee. But, most of the banks state this amount alone is not
sufficient to service the pensions. There is a huge uncovered deficit .
|
Bank will contribute
an equal amount, matching the employee’s contribution. Both employee’s contribution and the bank’s
contribution will be clubbed and kept in a single account. Balances in
this account will be investedin pension funds.
|
Because of higher
contribution by the bank, the Pension Corpus Fund will be much larger.
|
Additional
Contribution from the employee
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Employees can
voluntarily contribute an additional amount that is equal to the compulsory
P.F. Employees have the freedom to stop VPF contribution, as and
when they want, by giving 1 month notice.
|
Tier II account is a voluntary saving
facility, wherein the subscriber is permitted to save any additional
amount. Withdrawals from Tier II Account are allowed, as per the subscriber's
choice.
|
From Tier II
account, unlimited number of withdrawals are permitted, with the only condition that a
minimumbalance of
Rs 2000 is maintained at the end of the Financial Year (i.e. as on 31st March).
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Where
the funds will be invested?
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(a) 40% of the PF
funds will beinvested in Government
securities and Government guaranteed securities. (b) Another 30% will
be invested in Bonds and Securities of Public Financial Institutions which
include public sector banks and Short Term Deposits of public sector
banks. (c) The remaining 30% of the funds may be invested in any of the above-mentioned securities. (d)
Notwithstanding the above, up to 10% of the total funds may beinvested in private sector bonds/securities, which have aninvestment grade rating from at least two credit
rating agencies.
Banks do not have
total transparency nor consistency with regard to their investment policies and decisions made, insofar as the P.F. funds, as of
now.
As regards investments made out of Bank’s contribution, nothing is
known.
|
Each of the PFMs
will invest the funds in the proportion of 85% in fixed income instruments
and 15% in equity and equity linked mutual funds.
There are 3 types of
funds in which subscribers can invest.
They are 1. Asset
Class ‘E’ – Equity Market instruments 2. Asset Class ‘G’ – Government
Securities 3. Asset Class ‘C’ – Credit Risk bearing Fixed Income
instruments.
A subscriber has got
a choice to switch between schemes and change the fund manager too, if his
performance is not satisfactory.
|
Since the funds
areinvested in bonds and
securities, their prices and their earning potential have high degree of
volatility.
Fixed income
securities are also not free from market risks, one must remember.
Though it is claimed
that professional fund managers will take decisions with regard toinvestment of the funds, ordinary subscribers do not
have sufficient time and requisite knowledge to understand suchinvestment decisions and question the fund managers.
How far the assured 100% transparency in the functions of the pension fund
manager will be maintained is also a moot question.
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Important Features
|
Old Pension Scheme
|
New Pension Scheme
|
Intricacies and Implications
|
Who
will Manage the Funds?
|
At
present, a P.F. Trust comprising of members drawn from the management, award
staff union and officers’ union manage the funds. They meet at fixed
intervals and take decisions with regard toinvestments, rollover/extension, withdrawal, loans and final
payment on VRS/CRS/ Superannuation.
|
ICICI
Prudential Pension Funds Management Company Ltd, IDFC Pension Fund Management
Company Ltd, Kotak Mahindra Pension Fund Ltd, Reliance Capital Pension Fund
Ltd, SBI Pension Funds Private Limited and UTI Retirement Solutions Ltd are
the 6 fund managers approved by PFRDA.
|
It
is difficult to forecast the efficiency in the performance of the fund managers. Having only 6
fund managers makes it a risky proposition. If we take into account the
working population of India, this number is very
less. As thenumber of subscribers increases, hopefully the government will allow
more players in this filed.
|
Regulatory
Agency
|
As of now, there is no separate agency at the national
level for overseeing P.F. funds. Multiple agencies like Regional
Provident Fund Commissioners, Company Law Board (in case of companies)and Ministry of Labour are
overseeing the administration of PF funds. The courts having jurisdiction
will hear all the cases and disputes, as per the provisions contained in The
Provident Funds Act, 1925.
|
Pension
Fund Regulatory and Development Authority (PFRDA) is the regulatory body.
PFRDA was established by Government of India on 23rd August, 2003. The government has
through an executive order dated 10thOctober, 2003 mandated PFRDA
to act as a regulator for the pension sector. The mandate of PFRDA is
development and regulation of pension sector in India.
NSDL e-Governance Infrastructure Limited and PFRDA have
entered into an agreement relating to the setting up of a Central
Recordkeeping Agency (CRA) for the National Pension System (NPS).
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The
extent of autonomy enjoyed by PFRDA is yet to be tested. In case of
default or malpractices noticed, whether PFRDA has necessary punitive powers
and if so, to what extent they are effective are yet to be known.
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Fees/Charges
deducted
|
There
are no charges deducted. Even the administrative expenses like postage,
stationery, telephones, electricity and rent are absorbed by the bank.
As there is no full time member for the P.F. trust, no salaries are paid to them. This way, no additional cost is passed on to
the subscriber.
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Following costs are to be borne by the
Subscribers at the time of registration and/or performing any transaction.
The contribution will be remitted, net of bank charges.
Fixed cost:
One-time account opening cost and issuance of PRAN –
Rs.50
Initial subscriber
registration and contribution upload – Rs.40
Annual maintenance charges –
Rs.225
Variable cost:
PoPs can now charge Rs 100
plus 0.25 per cent of theinvestment, as against a flat fee of Rs 20 earlier.
Annual custodian charge - 0.0075-0.05 per cent of the fund
value
Annual fund management charge - 0.0102 per cent of the fund
value
|
NPS
is touted as thelowest cost pension scheme. Other handling and administrative
charges are also claimed to be the lowest. There are no entry and exit loads.
But,
it remains to be seen how the actual costs move in the future.
With inflation, the costs may go up further. When more pension fund
managers enter the fray and the subscriber base also expands vastly, the
charges may also come down in future.
Whatever
be the charges, they result in diminution of the pension wealth.
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Important Features
|
Old Pension Scheme
|
New Pension Scheme
|
Intricacies and Implications
|
Anticipated Returns
from theinvestments
|
There is no minimum
assured return. Many banks offer less than the maximum interest rate
paid on Term Deposits of staff members. Quite often, the interest paid on
P.F. in banks is lower than the interest paid by EPO of the central
government. However,
positive returns are assured and there is no way that the principal gets
eroded. As on date,
interest at 8.5% p.a. is being paid on the subscription made by the employee
and the employer, in most of the banks.
|
There is no minimum
guaranteed return in NPS.
Depending on the performance of the various pension funds in the years to
come, the appreciation in the fund value will vary and it cannot be forecast
right now.
|
Since the returns
are market determined, the risks associated cannot be avoided.
NPS
has delivered 5 to 12 per cent annual returns in the past three years. Due to
the market downturn, the return from the equity portfolio has been the lowest
(around 5 per cent), while the Asset Class C has returned up to 12 per cent a
year.
However, we shall
not forget the fact that even in developed economies, NAV of several pension
funds has come down below par value, resulting in huge loss to the
subscribers, either due economic depression or mismanagement of the pension
funds.
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Loans
|
Loans may be availed
for various purposes, within the limit fixed for each purpose, as per the
guidelines fixed by individual banks.
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Loan facility is notavailable.
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Even in emergency
situations, an employee cannot borrow against his own contribution.
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Withdrawals while in
service
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Non-refundable
withdrawals from individual contributions are permitted for purposes like
-
(a) purchase of
vacant plot and construction of a house thereon
(b) outright
purchase of a house/flat
(c) marriage of
children and
(d) medical expenses
in connection with treatment of major ailments subject to certain conditions
on limits, length of service etc.
|
At any point of
time, before 60 years of age, 80% of the pension wealth is to be invested in
a life annuity scheme from any IRDA regulated life insurance company namely, Life Insurance Corporation
of India (LIC), SBI Life Insurance, ICICI Prudential Life Insurance, Bajaj
Allianz Life Insurance, Star Union Dai-ichi and Reliance Life Insurance.
The remaining 20% of
the pension wealth may be withdrawn as lump sum. On the amount
withdrawn too, tax has to be paid.
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This negative clause
acts as a dampener to those who want to take VRS before attaining 60
years. It takes away the freedom of choices available to the
subscribers.
Since
the NPS is meant for retirement and financial security, it does not permit
flexible withdrawals as are possible in the case of mutual funds.
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Withdrawals after
retirement
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The individual’s
contribution, along with accumulated interest, will be paid back to the
employee. The employer’s contribution along with the interest thereon
will be utilised to build up the corpus for payment of monthly pension to the
employee for the rest of his life.
|
Between 60 and 70
years, not less than 40% of the pension wealth is to be invested in annuity
and the balance can be withdrawn in instalments or as a lump sum by the
employee. In case of phased
withdrawal, minimum of 10% of the pension wealth should be withdrawn every
year. On attaining the age of 70 years, the amount lying to the credit of the
subscriber should be compulsorily withdrawn in lump sum.
|
After attaining 60
years too, one does not have the freedom to withdraw his own contribution
i.e. up to 50% of the pension wealth. Thus, much of the lifetime
savings of the employee gets locked up in annuity, much against his wish.
It is a major setback to the senior citizens and it is a great
injustice. Pensioners aged between 60 and 70 years are the worst
affected.
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Important Features
|
Old Pension Scheme
|
New Pension Scheme
|
Intricacies and Implications
|
Payment on the death
of the subscriber,before retirement
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If the subscriber
dies before retirement, his individual contribution to P.F. with the accrued
interest is paid to the nominee. Bank’s contribution is retained to
service Family Pension.
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In the unfortunate
event of the death of the subscriber, option will be available to the nominee
to either receive 100% of the pension wealth in lump sum or to continue with
the NPS in his individual capacity, after complying with the KYC norms.
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Most of the legal
heirs of the deceased employee will be compelled to accept the lump sum only,
as they do
not derive any extra
benefit by continuing in the scheme.
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Payment on the death
of the subscriber, after
retirement
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If the pensioner
dies after retirement, the spouse receives family pension at reduced rates as
discussed above. In case of dependent son/daughter, family pension is
payable to him/her till he/she attains the age of 25 years or starts earning
Rs.2,550 per month whichever occurs earlier.
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Same
as above.
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Same
as above.
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Amount of Pension
paid
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The pension payable
is linked to the average pay drawn during the last 10 months of service.
Besides, D.A. is also paid on the Basic Pension, even after
commutation. These rates are decided at the time of each wage revision
settlement.
|
The
value of the annuity purchased at the time of retirement will determine the
amount of monthly pension. Monthly pension under NPS is a fixed amount
and it will attract any D.A. and therefore, in case of rise in AICPI, no
additional benefit will accrue to the pensioner.
|
Over a period of time, the value of pension amount will
diminish in real terms, due to inflation. Therefore, pension received under NPS
is not at all beneficial to the pensioner during his life time, as compared
to the pension under the old scheme.
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Family Pension
|
Besides, the spouse
of the deceased is paid family pension at a reduced rate (which ranges from
15% to 30% of the Basic pension payable).
|
No
family pension is paid, after the death of the subscriber/pensioner.
Only the pension wealth in lump sum is paid.
|
The dependents of
the pensioner do not receive any family pension which attracts D.A. It
may please be noted that D.A. also stands revised periodically, whenever
there is a rise in consumer price index.
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Income Tax Benefits
|
For Individual
Employees contributing to the NPS, their investment is eligible for deduction
from Income under Section 80-CCD(1) of the Income Tax Act, 1961. However, the
aggregate of all investments under Section 80-C and the premium on pension
products on Section 80CCC should not exceed Rs.1 lakh per assessment year to
claim for the deduction.
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Under
Section 80-CCD(2) of Income Tax Act, if an employer contributes 10% of the
salary (basic salary plusdearness allowance) to the NPS account of the employee,
that amount gets tax exemption of up to Rs 1 lakh.
However, this is within the overall limit of Rs.1
lakh for all eligible investments put together under Sec.80-C.
|
Though
the employer also gets tax benefit under Section 36 I (IV) A for his
contribution, it hardly makes any difference for the employees.
Moreover, for an employee who has already exhausted his full limit of Rs.1
Lakh for investments under Sec.80-C, contributions made to NPS under Sec.80-CCD(1)
do not confer any extra benefit.
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Income tax liability
|
No tax is deducted
on loans, partial withdrawals (non-refundable) while in service and total
withdrawal after retirement.
|
On retirement, 60%
of the savings may be withdrawn in cash and it is taxable. The
remaining 40% will have to be invested in a Pension/Annuity Fund and it is
tax free (at the time of investment).
|
At
the time of withdrawal, the lump sum would be taxable as per the individual’s
tax slab. It is a case of EET (exempt on contributions made, exempt on
accumulation, taxed on maturity) unlike EPF, PPF which are EEE (exempt,
exempt, exempt). Hence, the tax liability will be huge at the
time of withdrawing the funds.
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Important Features
|
Old Pension Scheme
|
New Pension Scheme
|
Intricacies and Implications
|
Simplicity of
procedures
|
The existing
procedures are very simple, easy to understand and easy to follow. The
employer does most of the jobs for the employees.
|
Since all the
transactions are done online, they can be easily tracked. But, the
burden of tracking one’s investments falls on the subscriber.
|
Since the systems
and procedures are complex, employees will face difficulties and
inconvenience throughout their life. It is difficult to evaluate and
choose the fund manager and also the scheme to invest. Moreover, people
cannot take right decisions with regard to switching from one fund to
another, even though such facility is available.
|
Why NPS is not popular?
Main reason = Low Commission
1.
Because NPS offers very
low Commission to Fund managers (ICICI, SBI, UTI etc.)
2.
So those players (ICICI,
SBI) rather prefer to market their own pension, insurance, retirement plans
rather than promoting NPS among their (regular) bank customers.
3.
Same goes for financial
advisor, insurance agents etc. They get more Commission by promoting
pension/insurance/retirement plans of private companies to their clients,
compared to NPS.
Why NPS does not compare favourably with old
Pension Scheme?
Tax Implications
1. Income Tax benefits under NPS are not
significantly higher than the existing investment options.
2. Similarly, the ‘Exempt, Exempt, Tax’ (EET) under
NPS is a great discouraging factor.
Other reasons
1. In NPS, there are multiple actors: POPs, PFRDA,
CRA and fund managers.
2. NPS doesn’t offer uniform rate of return.
3. Common people find this setup difficult and
unsecure, unlike tried and trusted LIC or PPF.
4. NPS is not spending lot of money on ads with
film stars / cricketers.
5. As far as structure and cost
are concerned, NPS is the best retirement option. But people are reluctant to
invest in NPS, due to taxation and liquidity issues. Mutual funds score over
NPS in both these aspects, which is why financial advisors have reservations in
recommending the product.
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