National Pension System: Govt Mulls Ways To Make NPS More Attractive


The National Pension System Trust (NPS Trust) is a specialised section of the Pension Fund Regulatory and Development Authority, which is overseen by India’s Ministry of Finance. In India, the National Pension Scheme (NPS) is a defined contribution pension system with a voluntary component. In India, the National Pension System, like the PPF and the EPF, is an EEE (Exempt-Exempt-Exempt) vehicle, meaning that the entire corpus is tax-free at maturity and the entire pension withdrawal amount is tax-free.

The NPS began with the Government of India’s decision to end defined benefit pensions for all employees hired after April 1, 2004. While the scheme was originally intended solely for government employees, it was expanded in 2009 to include all Indian citizens aged 18 to 65, as well as OCI card holders and PIOs. PFRDA raised the National Pension System (NPS) entry age from 65 to 70 years old on August 26, 2021. Any Indian citizen, resident or non-resident, and Overseas Citizen of India (OCI) between the ages of 65 and 70 can join NPS and continue or postpone their NPS account up to the age of 75, according to the new rules. The Pension Fund Regulatory and Development Authority (PFRDA) is in charge of its administration and regulation.

With some Opposition-controlled states announcing plans to reintroduce the old defined-benefit pension scheme (OPS) for their employees and abandon the reform-oriented contributory national pension system (NPS), the Union government may suggest annuitizing the entire government contribution to NPS as an alternative. To improve their pension payouts, the government is considering enabling employees to invest more than 40% of the NPS corpus in systematic withdrawal plans and inflation-indexed products. Under the NPS, a person can withdraw 60% of the accumulated corpus from contributions made during their working years when they retire. It is also tax-free to make such a withdrawal. The remaining 40% is invested in annuities, which might offer a pension equivalent to around 35% of last salary drawn, according to estimates. Government employees used to receive 50% of their last wage as a pension under the OPS.

If 60% of the contribution is annuitized, which generally matches to the contribution by the federal and state governments, the NPS pension can be close to 45 percent of the last drawn wage. The 5% deficit can be closed by the concerned government donating a bit more to the NPS. According to an authoritative source, this is considered as a far better option than reintroducing the unsustainable OPS model. Employees will also be able to withdraw the corpus altogether from their personal contributions at the time of their departure. In response to a question in Parliament, the finance ministry recently stated that a government employee could contribute her full salary to the NPS for annuitization, potentially increasing the pension income to more than 50% of the salary.

Since FY20, Central government employees have been eligible for a deduction of 24 percent of their income for NPS contributions (employees’ contribution of 10% and employers’ share of 14 percent), and as many as 15 state governments have increased employers’ portion to 14 percent. Rajasthan revealed a plan in its FY23 budget to restore the previous pension scheme for all state government employees beginning in the next fiscal year, and Chhattisgarh followed suit. This, if enacted, might add to their financial burden.

Following the Centre’s implementation of the NPS for all new workers on January 1, 2004, several major states made it mandatory for their employees in 2004 or 2005, with Rajasthan joining on January 1, 2004 and Chhattisgarh joining on November 1, 2004. During this time, both of these states were ruled by either the BJP or the Congress. The ruling DMK in Tamil Nadu stated that OPS would be restored ahead of state legislature elections in early 2021. However, the DMK government has yet to reveal the initiative, ostensibly due to fiscal restrictions. Other states’ pension funds are managed by fund managers nominated by the pension regulator, however Tamil Nadu manages its NPS corpus autonomously. About 5.5 million state government employees were enrolled in NPS as of February 28, 2022, with Rs 3.61 trillion in assets under management (AUM). The scheme covers around 2.27 million central government employees and has an AUM of Rs 2.15 trillion. NPS results are substantially superior to those of other superannuation funds. For example, in FY22, government-sector subscribers received a return of over 10% under NPS, compared to 8.1 percent under EPFO and over 8% from a few of superannuation funds sponsored by insurance companies, the schemes that compete with NPS.

“OPS forces future generations to foot the bill for pensions.” Because of its unsustainable nature, governments may default on payment responsibilities, whereas NPS has a genuine corpus that would provide for a certain pension,” said Gautam Bhardwaj, co-founder of pinBox, a global pension-tech company dedicated to digital micro-pension inclusion in Asia and Africa. The country’s implicit pension debt (IPD) — central (civil) employees, state government employees, and the financing gap of the Employees’ Pension Scheme, 1995 — was 64.51 percent of GDP in nominal terms in 2004, according to a report by the Old Age Social and Income Security Project. Of fact, the actual IPD, or net present value of these future commitments, would have been far larger if the defence pension liability had been taken into account.

“Pension obligations on account of the Centre’s and states’ OPS are still off-balance sheet liabilities, and they’ve been growing since 2004,” Bhardwaj added. The pension bill will continue to climb until all employees who joined the federal government before January 1, 2004, and most large state governments before April 1, 2005, retire. Following that, the pension burden will be significantly reduced because employees who joined after the deadline are financed through a contributory NPS and will not require budget support. “As life expectancy rises, so does the pension load, which will persist for another two decades until the OPS-eligible employees retire.” Returning to the OPS will put more strain on state finances in the long run, according to India Ratings’ chief economist, DK Pant said.

State governments have been able to consolidate their finances in the previous decade thanks to institutional initiatives such as Fiscal Responsibility and Budget Management Acts, Value Added Tax, and NPS. With the exception of a few rare years, such as FY21, when Covid-19 resulted in a sharp increase in revenue spending, states have managed to keep their fiscal deficits around 3% of GSDP throughout the last decade. Fixed overheads in the form of establishment expenditure (mostly in the form of salaries, wages, bonuses, and pensions) account for more than half of all state revenue expenditure. Despite labour union demands, the Centre recently notified Parliament that it will not restore OPS. “If a subscriber desires a bigger pension, he or she may choose a higher percentage of the corpus (up to 100 percent) to be used for annuity purchase, which would result in a higher pension amount,” the Union finance ministry stated.