PFRDA chairman in talks with government for NPS overhaul

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The Pension Fund Regulatory and Development Authority (PFRDA) is in talks with the government to the make National Pension System (NPS) more attractive. In an interview with the Times of India, PFRDA chairman Supratim Bandyopadhyay said overhauling may include various changes ranging from offering tax benefits, launching of systematic withdrawal plans (SWP), to seeking inflation-indexed annuities from the insurance regulator.

“We are suggesting that the pension coming from annuity should be made tax-free up to a certain level, say, Rs 10 lakh a year. It should be either tax-free or lower tax may be charged… Today, a monthly income of Rs 60,000-70,000 may look decent but 10-15 years down the line, it may not even meet your basic needs. So, indexation and taxation can play a role,” he said in the interview.

What does it mean for the investors?

As per the regulator the annuities giving 5-6% return in a declining interest rate scenario, is not a value-added proposition for the investors with long-term horizon. For instance, an investment of Rs 2 lakh will not fetch much returns to investors via annuities.

That said, the regulator has suggested to the government to double the annual tax benefit of Rs 50,000 for NPS. He also made a point for the investors to ease the rule for the complete withdrawal of the money who has the corpus amount upto Rs 5 lakh.

Further, the regulator is also seeking for registering individuals as points of presence (PoPs) to expand its distribution network by willing to pay them a higher commission. At present, PoPs are paid around Rs 200 for new customer and 0.2% as an investment commission.

“The effort has been to keep the overall cost structure low. It has helped subscribers, but a time has come to encourage the distribution channel to improve the coverage and expand the corpus. Today, the threat of dying early is slowly going away and it is taken over by the risk of living long… We will try to see what best we can give to our distribution partners but I am not sure if we can manage the kind of returns that the insurance industry gives,” said the chairman.

As per present guidelines, investors can only withdraw 60% of the accumulated corpus at the age of 60 and the rest should be invested in annuities, hence this investment can have some issues with liquidity. Having said that, the regulator has also proposed to allow investors to park their entire corpus into SWP. With this option in place, the investors would be eligible to withdraw more money on maturity as per their required needs.

At the start of this year, PFRDA has also taken a series of digital initiatives including reducing turnaround time (TAT) for its processes thereby providing online and paperless solutions so that the NPS subscribers can meet their specific needs on time while partial withdrawals.