NPS needs tinkering, not EPF

It is hard to believe that Finance Minister Arun Jaitley could not have anticipated the magnitude of resistance that would follow his proposal to tax employee provident fund (EPF) withdrawals.

Being the only long-term savings for millions of employees, EPF was clearly a sensitive issue and no government would have attempted to tamper with its structure without compelling reasons.

Jaitley had one. Though, in the strictest sense, it was not directly EPF related.

What the finance minister wanted to do was to encourage more private sector employees to go for pension security after retirement instead of withdrawing the entire money from the provident fund account. In other words, he wanted to get more people to put more money in the country's national pension System (NPS), the take-off of which has so far been far from optimal.

It was more of an attempt to rejuvenate NPS than course-correct EPF that Jaitley tried through his budget proposal when he stated that in the case of superannuation funds and recognised provident funds, including EPF, 60 per cent of the withdrawals will be taxed if not invested in pension plans.

Of course, the proposal has been withdrawn because of widespread opposition, but it can always return in some form or the other, unless the problem that compelled Jaitley to suggest the proposal in the first place gets addressed.  

According to the Economic Survey 2015/16, NPS is a defined contribution-based pension scheme with the objectives of providing old-age income, market-based returns over the long run and extending old-age income security coverage to all citizens. The government, as the Survey points out, has been attempting to widen the reach of the scheme beyond employees who are within the government fold.

The total number of people who have enrolled under NPS till 31 December 2015 is 11.2 million. One tenth of these come from the government sponsored scheme Atal Pension Yojana where the Central government co-contributes 50 per cent of the total contribution subject to a maximum of Rs 1,000 per annum, to each eligible subscriber's account, for a period of five years, i.e. from FY 2015/16 to FY 2019/20. These APY beneficiaries are not members of any statutory social security scheme and do not pay income tax.

Compared to that there are on average 36 million employees who have contributed to the EPF during April, 2015 to November, 2015. Nudging them to join NPS would have given a big boost to the government's pension plans. Now that it has not worked, what should the government do next?

The simplest way will be to make NPS more attractive. As it stands today, EPF provides much better returns to the subscriber than what NPS offers. As against the 8.75 per cent annual interest the EPF can earn, pension schemes hardly fetch 7 per cent. Experts say that the government need not tamper with EPF to add more members to the pension scheme.

Just make the pension scheme attractive, and there will be voluntary enrolment.