It is striking that in a rising market, equity schemes of mutual funds have recorded net inflows of Rs 55,782 crore in the first 10 months of this year, whereas assets under management (AUM) in the National Pension System (NPS) have expanded by barely half that. The comparison becomes starker if one excludes the NPS for government employees, which involves mandatory defined contributions and where the monies land into individual retirement accounts by default. If the NPS schemes, both equity and debt, for private subscribers alone are considered, their combined AUM have gone up by a measly Rs 789 crore, to about Rs 1,900 crore in January. This, despite these schemes generating not just inflation-beating but even Sensex-plus returns from April 2014 to January.
This lack of investor interest in the NPS has mainly to do with the unequal tax treatment vis à vis equity mutual fund schemes or even other social security schemes, such as the Employees Provident Fund. In the latter, there is no tax on contributions, accumulations or withdrawals. In contrast, the NPS monies attract tax on withdrawal, which is highly perverse in a country that provides no pension or social safety benefits to anyone other than government employees (that too, only those who joined before 2004). If the state isn’t in a position to provide pension to the vast majority of its citizens, the least it could do is not tax those attempting to build retirement nest eggs through hard-earned savings. The coming Union budget should correct this flaw by making NPS investments tax-exempt at all three stages. This is a just reward for those willing to save today to secure their future.
The government should go further in promoting the NPS. Currently, there is little awareness about it, especially among the middle class and low-income earners who need it the most. The procedure to open an NPS account is cumbersome, and the fund managers concerned are uninterested in pushing it. The primary reason is the fund management fee of barely 0.01 per cent on the AUM, as against up to 1.5 per cent for equity schemes of mutual funds. Distribution costs are, likewise, capped at 0.25 per cent or thereabouts, which again is low. This, too, needs to be rationalised. As long as the NPS funds are managed well and provide reasonable returns, subscribers won’t mind paying slightly higher fees.
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