To boost economic inclusiveness, the government announced a new incentive to its pension scheme, which aims to strengthen the social security cushion for millions of workers in the unorganized sector.
For every annual contribution of between Rs1,000 and Rs12,000 in 2010-11 in the New Pension System (NPS), the government will put in Rs1,000 every year for three years.
Although the state’s contribution would be for all new NPS accounts opened in 2010-11, finance minister Pranab Mukherjee indicated in his Budget speech that this inducement was mainly directed at unorganized sector workers.
“The minimum contribution that one can make under the (existing) NPS is Rs6,000 per annum,” said Rani S. Nair, executive director, Pension Fund Regulatory and Development Authority (PFRDA). “Hence, individuals investing between Rs6,000 and Rs12,000 per annum will benefit by another Rs1,000.”
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“Contribution by the government is a great idea to encourage people to save for retirement,” said Gautam Bharadwaj, director, Invest India Economic Foundation, a think-tank.
“The Budget would encourage contributions from people in the unorganized sector since they need social security the most,” Nair said.
India’s unorganized sector employs about 86% of the workforce, according to Invest India.
However, former PFRDA chairman D. Swarup said more could have been done. “It is a good move to induce people to join the retirement savings plan, but restricting government contribution to only those saving up to Rs12,000 per year could prove to be a dis-incentive to save more,” he said.
For a proposed low-cost NPS expected to be launched from 1 April the minimum annual contribution could be Rs1,200, which is targeted at low income groups, Nair said.
The low-cost NPS is expected to be maintained at a marginal cost. “Apart from the fund management charge of 0.0009%, contributors of the low-cost NPS would have to pay about Rs70 as annual maintenance charge and a one-time permanent retirement account number card charge of Rs35,” Nair said.
Money in NPS accounts are locked in till the contributed is 60 years of age. After that, the customer can withdraw up to 60% of the funds as a lump-sum benefit. The remaining 40% is used to buy a product that provides periodic payments from a life insurer.
Under the scheme, the investor can choose two investment options. The first, called active choice, allows the investor to allocate funds across three fund options: equity in which one can put a maximum of 50%, fixed income instruments other than government securities.
The second, called auto choice, is a system where the fund automatically allocates a maximum of 50% to equity until the age of 35 years, which tapers off to 10% by age 55 to provide stability to the portfolio as the investor reaches his retirement age.
There are six fund managers to choose from: ICICI Prudential Pension Fund Management Co. Ltd, IDFC Pension Fund Management Co. Ltd, Kotak Mahindra Pension Fund Ltd, Reliance Capital Pension Fund Ltd, SBI Pension Funds Pvt. Ltd and UTI Retirement Solutions Ltd.
The NPS comes a close third in the basket of investment vehicles for retirement after the Employees Provident Fund and Public Provident Fund, because NPS lacks the tax benefit of the the other two.
The Budget did not address the tax issue. But once the proposed direct tax code comes into effect, NPS would become comparable with the other schemes as tax treatment of all pension instruments would be the same. It has been proposed that they be tax-exempt at the time of contribution and accumulation, but taxable at the time of withdrawal.