The Pension Fund Regulatory and Development Authority (PFRDA) is working on a plan to introduce an alternative to the mandatory annuity that a subscriber has to buy when exiting the National Pension Scheme (NPS).
There are two proposals in the works that the PFRDA will put forth to the finance ministry after the feedback it received from subscribers. “Subscribers told us that they have been getting over 9% returns during the accumulation phase. But on retirement, the payout in an annuity plan works out to be much lower. At present, it is at 6.0-6.5%. We, therefore decided to come up with alternatives to the existing annuity plan," said Supratim Bandyopadhyay, chairperson, PFRDA, during a press meet.
Subscribers can exit the NPS on superannuation – attaining the age of 60. They have to mandatorily purchase an annuity plan with 40% of the accumulated corpus. For this, NPS Trust has empanelled insurance companies. This has been a sore point for subscribers as well as financial planners as the payout from an annuity plan is low and also taxed. PFRDA is, therefore, working on options besides annuity for the 40% corpus.
One of the options that PFRDA is working on is introducing a Systematic Withdrawal Plan (SWP) for NPS subscribers on maturity as an additional option. An SWP withdraws a fixed amount every month from an accumulated corpus. The remaining money continues to be invested.
If implemented, the Central Board of Direct Taxes (CBDT) would decide on the taxation of NPS. But it could be similar to that of SWF in a mutual fund. The long term capital gains tax for equities is charged at 10% if investments are redeemed after one year of investment. But if the total gains are less than ₹1 lakh in a financial year; there is no tax. In case of debt fund, the long term capital gains tax is charged at 20% with indexation benefit if an investor withdraws after three years of investment.
With SWP, investors will get more freedom to withdraw as per their needs rather than being locked into an interest rate. “The money will remain in the system and subscribers can continue to get better returns than what annuities offer at present," said Bandyopadhyay.
The second option is that PFRDA has its own annuity plan, which would be a variable annuity. In such a plan, the subscriber would get a payout depending on the performance of investments. In many cases, the variable annuity plan also allows investors to choose the instruments where they want to invest.
At present, both the proposals are in the development stage. The PFRDA is consulting with the finance ministry on it and working out on the modalities. “The ministry has asked us to work on the proposals and present the details of how they would work out," said Bandyopadhyay.