Supratim Bandyopadhyay’s appointment as PFRDA chairperson in February came soon after the budget proposal to separate the National Pension System (NPS) Trust from PFRDA, as a regulator managing a fund could lead to conflict of interest. PFRDA also wants to regulate all pension schemes. In an interview with Mint, Bandyopadhyay spoke about the changes he wants to bring about in the pension space
As the new chairperson, what would be your immediate priorities?
The first priority is to see that the proposed amendment to the Pension Fund Regulatory and Development Authority (PFRDA) Act that was announced in the Budget goes through smoothly (the budget proposed to separate NPS Trust from PFRDA. There is a view that a regulator managing funds can lead to conflict of interest). We have to do a lot of groundwork and be ready for the changes internally. The parliamentary process may take some time.
For this, we are working on the structure of the NPS Trust after its separation from PFRDA. Proposals have to go from us to the government. After that, there will be consultations with the government.
We have also proposed to the government to have uniform taxation in NPS, which we expected in the Budget. The 14% NPS contribution by the central government for its employees is tax-free. But it is 10% for state government employees and other individuals. We had proposed that the 14% contribution from the employer should be tax-free for all subscribers. The proposal did not get through in the budget, but we will be pursuing it with the government.
We also requested clarifications on other aspects of NPS taxation. For example, we have sought clarity on the taxation if a subscriber withdraws from his tier-II account.
There have been talks on introducing alternatives to the mandatory annuity that an NPS subscriber needs to buy with the 40% corpus on maturity. What are your plans?
At present, we are at a nascent stage. There are two ideas we are exploring. One, we are looking at whether the 40% corpus can remain within the system. Our fund managers will invest this corpus in the market and pay out the subscriber. The other option is to introduce some kind of systematic withdrawal plan. But we have to work out the final structure for these ideas.
The budget has proposed to limit the total tax-exempt amount of the employer’s contribution to the Employees’ Provident Fund (EPF), NPS and superannuation accounts to ₹7.5 lakh. Will it create problems in getting new subscribers to NPS?
It is not a significant challenge. We have to see the number of people who can get affected by the ₹7.5 lakh cap. Today, an individual can put about 30% of his salary if he has all the options at his disposal—EPF, superannuation and NPS. For a person to cross the ₹7.5 lakh cap, he needs to have a basic salary of about ₹22 lakh-23 lakh or more. Such cases are limited, and we feel there may not be any immediate impact on enrolments.
Do you think the new tax structure that the government has proposed can impact individuals contributing to NPS since deduction under Sections 80C and 80CCD (1B) of the Income-tax Act will not be available?
Whether we like it or not, one day the tax benefits may go. Therefore, financial products will compete on merit, and people will realize the importance of pension products like NPS. Today, most of us invest just to get tax benefit. Individuals don’t realize that opting for a pension product will help them later in life. Doing away with the tax benefits will make them realize it.
But even under the new tax regime, the employers’ contribution towards NPS is tax-exempt under Section 80CCD (2).
Whatever fine print we have seen, the tax benefits in NPS remain. Unless it (the budget proposal) becomes an act and we have the final document, it’s difficult to say what will happen. But we are hopeful that the permissible deduction benefits in NPS would continue.
PFRDA could soon be regulating superannuation funds. What are the initial steps that you want to take in this area?
First, we would like to check the kind of investment guidelines they follow. Approved superannuation funds also have investment guidelines that are in line with EPF. We want to ascertain whether they are sticking to it. We have received feedback that there are companies which are investing their superannuation funds in their own bonds or equity, which is not fair. We will also check whether superannuation funds have put in too much money in a few instruments leading to concentration risk. We intend to put in place proper risk assessment procedures. Ultimately, the money belongs to the employees. If companies are not adhering to the guidelines, employees’ future will not be protected.
To start a superannuation fund, companies form a trust and obtain approval from the income tax commissioner. The contributions made by these companies to the superannuation fund qualify as business expenditure for them. Even the accumulation is tax-free. We are planning to propose to the tax department that companies should not get these tax benefits unless they are registered with PFRDA.
There have been defaults and rating downgrades in the recent past. Are there any specific guidelines you have given to the fund managers to ensure the funds are not impacted?
Fortunately, exposure to such papers is not high in NPS. But we have been advising fund managers to have their own risk assessment systems. We don’t tell them where to invest. It’s the fund managers’ call. However, we assess them every quarter to evaluate their performances.