Chairman, Pension Fund Regulatory and Development Authority (PFRDA), D. Swarup spoke to our correspondent about the benefits of NPS and affirmed that the scheme will become available to private citizens in five to six months, irrespective of the fate of the PFRDA Bill
How will the new pension scheme (NPS) benefit a potential subscriber when compared with existing products?
Basically, there are three features that make the NPS different from the various plans available today. One is portability. A subscriber will be given a unique account number, something on the lines of a PAN. With that number he will be able to transfer his account across jobs and geographical locations. At present, with a new job a person has to create a new account and close the old one. So it?s a seamless account that remains with you for your entire saving life.
The second unique aspect is cost effectiveness ? both in terms of fund management charge and load structure. There is no entry or exit load. The cost of management is quite low, ranging from 3 to 5 basis points (0.03 to 0.05 per cent).
The third aspect is flexibility. A subscriber will have the freedom to choose the fund manager and investment options. A menu of options, say, four to five, will be available.
Moreover, at the moment we have three fund managers. But once we open up the scheme to private sector citizens, we will appoint more fund managers. So far, we haven?t decided on a number yet, but we will definitely have more.
Will the NPS corpus continue to be heavily invested in debt (85 per cent) and less in equities (15 per cent)?
That is as of today. But once we open up this scheme to the private sector next year, then the five funds that I talked about will become operative. We have constituted a committee under Deepak Parekh. The committee is working out the investment norms for these fund managers. Its report will become available next month and we will put it in the public domain some time in December.
How many free switches will you allow?
There will be no cost at all for switching fund managers. But as for how many switches will be allowed in a year, we haven?t yet identified that number.
What happens after a person retires?
PFRDA is only concerned about the accumulation phase. At the time of the payout, a minimum of 40 per cent of the corpus will have to be annuitised, and 60 per cent can be paid lump sum, if the individual so wants. The annuity will have to be purchased by the subscriber from insurance companies.
What are the tax provisions attached to NPS?
The 60 per cent that will be paid lump sum will, as of now, be taxed at the withdrawal stage. But whatever is the annuity part will not be taxed. So there is a built-in incentive for a person to buy as much worth of annuities as possible.
However, we have taken up this matter with the government suggesting that even this 60 per cent should be free of tax, the idea being that there should be a level playing field.
How soon will the NPS become available to private sector investors?
We have been authorised by the government through executive orders to go ahead and open up the scheme to private citizens. So the Bill doesn?t really impede the progress of NPS. Perhaps, let?s say five to six months from now, it will be open to the private sector. Definitely, by the first quarter of the next calendar year.