SEBI to take up proposal to allow Mutual Fund Company’s to offer Pension plans

• In 2014, a new pensions system would be introduced in India that would offer retirement savers the option of tapping the high-risk-high-return equity markets. Stock market regulator, SEBI will in its next board meeting in January, 2014 would take up the proposal to allow mutual fund companies to offer pension plans.

The proposed Pension plans & National Pension Scheme (NPS):

• If the SEBI board approved the proposal, it could then request the government to extend to these mutual funds-run pension plans the same tax breaks that were now available to retirement savings in the government-run National Pension Scheme (NPS).This would need Parliament approval.
• Section 80 CCD of the Income Tax Act of NPS allows employers to deduct from their taxable income the contributions made on behalf of their employees to the NPS. The contributions to NPS schemes by employees, too, are treated tax-free. The tax benefit is over and above the Rs.1 lakh tax-free savings Section 80C of the Income Tax Act allows to individuals.
• Contributions to the proposed pension scheme will be discretionary. The NPS is the mandatory pension scheme for government employees hired after May 1, 2004, though it is open to private individuals too. The NPS does not give government employees the option of investing more than 8% of their retirement savings into equity markets. Private sector employers with more than 10 employees statutorily contribute on their behalf to the Employees’ Provident Fund Organisation (EPFO).
• The difference between existing mutual fund schemes and the proposed pension plans will be that withdrawals will ‘not’ be allowed before retirement unless in the case of specific exceptional circumstances.
• According to the proposal, the pension plans will offer retirement savers flexi-choices on the mix of fixed income and equity investment options. The NPS offers savers only three options and the EPFO offers none at all. The wider investor reach of mutual fund companies, it is expected, will give retirement savings a big push.
• In August, 2013 Finance Minister P. Chidambaram had proposed that the EPFO and the NPS be merged to make them viable, a proposal that has not progressed. India has one of the largest young populations in the world, but no viable pensions saving mechanism and this is a cause of concern.
• At present, India does not have a universal social security system to protect its older population from economic deprivation.

More about National Pension System (NPS):                    

• Government of India established Pension Fund Regulatory and Development Authority (PFRDA) – External website that opens in a new window on 10th October, 2003 to develop and regulate pension sector in the country. The NPS was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.
• Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1st May, 2009, NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis.
• Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central Government launched a co-contributory pension scheme, ‘Swavalamban Scheme – External website that opens in a new window’ in the Union Budget of 2010-11.
• Under Swavalamban Scheme – External website that opens in a new window, the government will contribute a sum of Rs.1,000 to each eligible NPS subscriber who contributes a minimum of Rs.1,000 and maximum Rs.12,000 per annum. This scheme is presently applicable upto F.Y.2016-17.

NPS offers following important features to help subscriber save for retirement:

• The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber’s life. This unique PRAN can be used from any location in India.

PRAN will provide access to two personal accounts:

• Tier I Account: This is a non-withdrawable account meant for savings for retirement.
• Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.

      More about Employees’ Provident Fund Organisation (EPFO):

• EPFO is a statutory body of the Government of India under the Ministry of Labour and Employment. It administers a compulsory contributory Provident Fund Scheme, Pension Scheme and an Insurance Scheme.
• The Employees’ Provident Fund came into existence with the promulgation of the Employees’ Provident Funds Ordinance on the 15th November, 1951. It was replaced by the Employees’ Provident Funds Act, 1952. It is now referred as the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 which extends to the whole of Indian except Jammu and Kashmir.
• It is one of the largest social security organisations in the India in terms of the number of covered beneficiaries and the volume of financial transactions undertaken. The EPFO’s apex decision making body is the Central Board of Trustee (CBT).

Mission:

• To extend the reach and Quality of publicly managed old-age Income security programs through consistent and ever-improving standards of compliance and benefit delivery in a manner that wins the approval and confidence of members in our methods, fairness, honesty and integrity, thereby contributing to the economic and social well-being of members.