"We are planning to reduce the 10-year period for partial withdrawals"
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"We are planning to reduce the 10-year period for partial withdrawals"

"NPS in Tier II, it is probably better than what mutual funds offer"

  • Delhi,  November 16, 2016  
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Hemant G. Contractor
Hemant G. Contractor,

Hemant G. Contractor, Chairman, Pension Fund Regulatory And Development Authority, talks with Teena Jain Kaushal about increasing the reach of the National Pension System and whether the introduction of an advisory fee will yield results

You recently introduced an advisory fee of 0.02 per cent for retirement advisors. Will it be attractive enough for advisors?

This 0.02 per cent is in addition to the Rs 120 that they get when they bring an account. So if they are able to convince a person about NPS, they will get Rs 120. This 0.02 per cent is the advisory fee that they will be able to charge. If the investor wants to know which fund to invest in, what kind of investment pattern to choose, an advisor can charge minimum of Rs 100 and maximum Rs 1000 for that kind of investment advice. We never wanted to compete with mutual funds because mutual fund charges are very high. We kept the charges reasonable so that people are also encouraged to go. If the feedback from the market requires it to be revised (increased), we will see. Also, we are not saying that the person should only become a retirement advisor; he/ she can do other things as well. Somebody who is already selling mutual funds or insurance can do NPS, too. So they will not be restricted to NPS, instead they will have multiple sources of income.

How does one become a retirement advisor?

There is a test we have prescribed. We have tied up with National Institute of Securities Market. The process has begun. Out of the 60 people who enrolled for the exam, 20 are able to pass. If they are exclusively engaged in NPS, then that's a problem. But many of them would be involved in several other things such as life insurance and mutual funds. I think it is not as bad as they make it out to be. If they are doing other things, they can suggest people to have NPS. They do not have to go out to sell NPS. It is a cross-selling product for them. They are already into other things, so NPS will be one more activity for them.

What has been the response to the e-NPS initiative?

This year, almost the same number of accounts has been opened through e-NPS as through the normal channel. It has caught up well. We got about 50,000 accounts through e-NPS. We find a lot of contributions coming through e-NPS. In fact, more than the number of accounts, the contribution level has gone up.

How do you plan to increase the reach of NPS?

Earlier, because of paperwork, people were finding it cumbersome to join online NPS. If you have an Aadhar or Pan card you can open an account in 10 minutes. The process of joining has become very easy. Contributions can also be made online. We have made the process of exiting very simple. Online exit is compulsory from April 1. We are also planning to reduce the 10-year period for partial withdrawals, so more people can withdraw in case of emergency, like for building a house, marriage in a family, health reason or education of a children. We will definitely bring it below ten years - probably five or three years. You can put an application for online withdrawal.

Why has corporate NPS not picked up?

It involves a change in the Act, and I believe the labour ministry is making changes in the EPFO Act. Right now, it is mandatory for those who fall under the EPFO scope to join EPFO. Also, the tax regime is to be considered; in EPFO there is a complete tax exemption. In our case, exemption is available only up to 40 per cent. So unless it is brought on par with EPFO, people will not come. No one will come from a tax-free system to one where tax is incurred.

Not many know about the Tier II account of NPS...

We are pushing it aggressively. The number has gone up this year. We have 47,000 accounts in Tier II - double that of last year. Returns are very good and the cost structure is very low in Tier II. Although it is taxable, people still find it attractive because the charges are the lowest in Tier II. If you look at the net return in Tier II, it is probably better than what mutual funds offer.

The tax treatment of NPS Tier II is ambiguous. How are the withdrawals taxed?

There is no tax exemption on Tier II. The entire amount is taxed depending on the tax status of the person. The full amount is taxable. There is no tax benefit on Tier II. Mutual funds have the benefit of indexation in debt funds, and equity funds if held for more than a year get capital gain. That is not available in NPS. We have written to CBDT requesting for exemption, and requesting it to be treated like a mutual fund till they clarify it as a taxable income.