BackWe need tax parity between NPS and EPF
PFRDA chairman talks about the effect of budget proposals on NPS and what to expect in the future
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The National Pension System (NPS) got a huge shot in the arm when the budget announced an additional tax deduction of up to ₹ 50,000 on contributions made to NPS under section 80CCD of the Income-tax Act. The budget also proposed that employees be given a choice between the Employees’ Provident Fund (EPF) and the NPS. Currently, EPF is a default retirement vehicle for many employees. In a conversation with Mint, chairman of Pension Fund Regulatory and Development Authority (PFRDA), Hemant G. Contractor, talks about the effect of the budget proposals and other changes to expect in the near future. Edited excerpts:
Budget 2015 has given an additional deduction of ₹ 50,000 on contributions made to NPS. Given the tax push, do you think the debate around increasing distributor commission will die down? The commission currently is capped at 0.25% of the contributions to a maximum of ₹ 25,000.
For subscribers, NPS is a wonderful product. Given the low cost structure, there is a natural attraction to this product. The fact is that this product sells itself because it’s so attractive in terms of returns and costs. A lot of people are already interested in NPS and the extra tax deduction will be a very strong pull factor. In this case, the distributors actually may not have much to do as NPS should sell by itself without exerting too much pressure. Clearly, the deduction of ₹ 50,000 has weakened the case for revising distributor incentive a bit, but that is not to say that there is no scope to modify the incentives.
We do receive feedback from distributors that the present system of compensation is not adequate. But our present distribution network is very strong. We have more than 70,000 points of presence across the country, though not all of these are active. We are reviewing compensation in order to incentivize our distributors to sell NPS, and we may marginally increase commissions.
For an employee choosing NPS meant reducing her disposable income as EPF was already a default option. But now there will be choice. Do you think people will make the shift? How is NPS a better option?
Yes, we may see some people shifting from EPF to NPS. But for that to happen, the nitty-gritty still needs to be worked out. Employees will definitely need a one-time portability to move from EPF to NPS. But for that we need parity in tax treatment. EPF is exempt-exempt-exempt but NPS is still taxable on maturity. But on the other side, our returns are better, we allow for equity investments and we are extremely low-cost. Ultimately, the customers need to make a choice, but the good thing is that now they will be able to make the choice.
You have recently started publishing returns of pension funds on www.npstrust.org.in, but the government bond fund and the corporate bond fund, which see maximum contributions, don’t have a benchmark assigned to them. This makes it difficult to assess the performance of these funds vis-a-vis their benchmarks. You have internal benchmarks to evaluate their performance. Will you be publishing those benchmarks?
What we have are customized benchmarks. There was an internal debate on whether these should be disclosed. Benchmarks are important for comparison and so we are coming around to the view that there is nothing lost if we publish the benchmarks. Therefore, the next time when we publish returns, we will also be disclosing the benchmarks. We are also instructing the pension fund managers to publish both NAVs (net asset values) and returns data on their websites.
The investment in equity is currently restricted to 50% for the private sector NPS. But younger people may want a larger equity component. Have you considered allowing investors to invest up to 100% in equities?
Speaking from actual experience, subscribers invest about 15% in equities even though we have allowed them to invest up to 50% of their money. There is a lot of talk about allowing for 100% investments in equities, but in reality, there is still a lot of hesitation in investing in equity. Maybe, now that the equity market has improved in the past six months, this may increase. But so far, our experience suggests that when it comes to saving for retirement, people have less appetite for equity than for debt.
The fund management charge of 0.01% is seen as unsustainable by many. Will the fund management fee increase?
The Bajpai committee is looking into the issue of fund management charge and other aspects, and the report is due to come out on 10 April. We can’t unilaterally increase the fund management fee because the cost was decided by an auction. It was actually the industry that decided the cost. But now with the PFRDA Act in place and regulations also getting ready, the pension fund managers will have to re-register themselves. At that point, we will take a call on whether we should go in for a fresh round of auction or not. We are going to review the whole process.
The PFRDA Act got notified in February 2014, but we are still waiting for key regulations to be notified. It’s been a year whereas the deadline was six months.
Yes, we sought an extension because first we came out with draft regulations for public comments and then we reviewed the comments so the whole process took some time. But now we are hoping that in April or latest by May, all the regulations will be in place.
With the passage of the insurance bill, even the pension sector has opened up to a higher foreign direct investment limit of 49%. Do you expect much interest from foreign firms? Will you increase the number of pension fund managers, which is currently restricted to eight for the private sector?
The pension sector doesn’t need the kind of capital that the insurance market does. So, from that perspective I don’t see many foreign companies being interested but what will definitely interest them is the sheer size of the market. We will examine opening up NPS to more pension fund managers should it be felt necessary.
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