How National Pension Scheme fared in past 11 years

Eleven years after the National Pension Scheme (NPS) was made available to all Indian workers and despite its initial hard-selling by the government as an attractive and credible social-security cover, the pension scheme has seen just 12.7 lakh voluntary subscribers, other than the employees in the government sector (where it is mandatory for new recruits since January 1, 2004), and the employees in the private corporate sector. Compare this to India’s workforce of 45 crore, and it’s evident that the government-promoted pension scheme hasn’t caught the fancy of the average Indian worker.

As many as 68 lakh government employees with the Centre and state governments and PSUs are now enrolled under the NPS; additionally, there are 9.92 lakh people employed in the private corporate sector subscribing to the scheme, as on April 30, 2020. Of course, there are an additional over 43 lakh workers in the unorganised sector, who the government managed to bring under NPS, thanks to the Swavalamban scheme, which was discontinued in 2015 and merged with the Atal Pension Yojana (APY) of minimum guaranteed pension launched in the year; but even this is only a tiny fraction of the over 40 crore unorganised sector workforce.

Analysts attribute the dismal show of NPS among the ordinary Indians to cumbersome enrollment process, bank’s apathy to market the scheme which carries lesser marketing incentives compared to mutual fund or insurance products and a tiring of the government propaganda machinery. Initially, the NPS also came with lesser tax reliefs compared to small savings instruments namely PPF, EPF and life insurance products, most of which carry the exempt-exempt-exempt (EEE) tag for taxation, meaning these are not taxed at the three stages of contribution, accumulation and withdrawal.

The Budget 2018 accorded NPS the EEE status, in addition to the additional tax deduction window of Rs 50,000/year granted in 2015, over and above the Section 80 (C ) relief of up to Rs 1,50,000 on assorted investments/payments. However, even these beneficial tax policies haven’t apparently added much to the attractiveness of the scheme to the common man – the annual growth in the NPS subscriber base among individual voluntary contributors decreased from 58% in 2017-18 to around 35% in both 2018-19 and 2019-20.

As on April 30, 2020, only 7,616 corporate firms have registered themselves under the NPS. Sources said those employed in the corporate sector could not join in the voluntarily NPS mainly constrained by dearth of liquidity after earmarking nearly a fourth of their wages towards the mandatory EPF scheme, which also guarantees pension after attaining the age of retirement.

In fact, the options given to those in the 18-40 years age group in the unorganised sector to migrate to APY and those above 40 years to continue with the Swavalamban scheme or exit it, have caused a decline in the subscribers’ base in the Swavalamban scheme to 43.3 lakh now, from 44.8 lakh at end of 2015-16.

On the other hand, the number of subscribers under the APY has gone up from 96 lakh at the end of 2017-18 to 2.24 crore as on May 9, 2020. During the first two years of its launch, almost 50 lakh subscribers were enrolled under APY which doubled to 100 lakhs in the third year and to 1.50 crore in the fourth year. In the last financial year, almost 70 lakh subscribers were enrolled under the scheme. APY scheme has co-contribution from the Centre – 50% of the subscriber’s contribution, up to Rs 1,000 per annum, for five years from 2015-16 to 2019-20 to those who joined the scheme before December 31, 2015.

The government had last year launched three pension schemes – the Pradhan Mantri Shram-Yogi Maandhan (PMSYM), which is meant for unorganised sector workers; the Pradhan Mantri Karam Yogi Maandhan Scheme (PMKYMS) for small traders; and one for the small and marginal farmers, with a guaranteed monthly pension of Rs 3,000 to the beneficiaries under both the schemes upon attaining the age of 60. Only in the pension scheme, the government’s target was to enroll five crore farmers in three years. The government makes matching contribution in these three schemes. “The availability of too many pension schemes is also a spoiler for the NPS even if it is the cheapest scheme run in the most transparent way possible,” said a source.

NPS was initially notified for central government employees joining service on or after January 1, 2004. Subsequently almost all state governments adopted the scheme for their employees. NPS was extended to all citizens of India on a voluntary basis from May 2009, to corporates in December 2011 and to non-resident Indians in October 2015.

Contributions made towards NPS are eligible for an additional tax deduction under section 80CCD(1B) up to Rs 50,000, which is over and above the Rs 1,50,000 limit of deduction available under sec 80CCD(1). NPS also comes with the EEE tax status. The scheme matures once an individual turns 60. On maturity, 60% of the corpus can be withdrawn and is also tax free. The balance 40% is required to be invested in annuity, which is also tax-exempt. However, on the monthly annuity income, one has to pay tax.