Seventh Pay Commission Report: NPS Recommendations

Published: November 20, 2015 at 2:26 pm

Last Updated on

Here are the recommendations in the seventh pay Commission report on the National Pension Scheme (NPS), aka the National Pension System.

The full report can be downloaded from here: http://finmin.nic.in/7cpc/7cpc_report_eng.pdf. NPS Recommendations can found on page 421.

In the introduction to this section, an astonishing fact is revealed.

In 1993-94, the total pension liability of central government employees was 0.6% of the GDP. This rose to 1.66% in 2002-03. CAGR of the pension expenditure was an astonishing 21% which put huge stress on the fiscal deficits. It became impossible to continue the defined benefit scheme which provided indexed pensions (DA twice a year). Hence was born the NPS, a defined contribution scheme.

The report lists the following as grievances of government employees against the NPS

  1. Market risk and uncertain future corpus
  2. 10% mandatory contribution a little too much(!)
  3. Some employees want only the government contribution to be eligible for pension just like EPF.
  4. No refundable advances possible with NPS unlike GPF! This make them borrow from elsewhere.
  5. Tax treatment: “lump sum withdrawals from NPS at any time are taxable at par with any other income. In addition, there is a service tax liability on any amount utilised for purchase of annuity”. This is important. Some ‘experts’ believed that for government employees, the lump sum amount is tax-free as it can be treated as a commuted pension. The commission’s statement reveals that such belief is baseless and as per current law, everyone has to pay tax as per slab.
  6. The annuity in NPS will not be indexed and will not increase due to future pay commissions. Both features are available under the previous scheme.
  7. Government employees can neither change fund managers nor the asset allocation.
  8. In contrast to pt 2, some people believe the total contribution may not be sufficient to generate enough corpus.

Recommendations

  1. The commission like the lifecycle based asset allocation option available in NPS (decrease equity exposure with age) and suggests tha this along with other asset allocation option be given to government employees.
  2. An expert body should analyze the 10% employee + 10% employer contribution and consider if this should be increased.
  3. All NPS contributions should be effected without delay, especially for new entrants.
  4. The commission notes (incorrectly) that Tier II is not operational.
  5. NPS awareness camps should be increased in number.
  6. NPS ombudsman should be created.
  7. No department of Government of India is taking ownership of the NPS. A government nominated committee should review progrress of NPS penetration.
  8. Tax Treatment under the NPS. Here is the extract:

NPS is under the Exempt–Exempt – Tax (EET) regime while the General Provident Fund under the OPS is under Exempt–Exempt–Exempt (EEE) dispensation. Under the NPS, while the contributions and the accumulations are tax-exempt, withdrawals are taxable. As such, this is an inferior tax treatment when compared to other pension programmes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund wherein contributions, accumulations and withdrawals are tax-exempt. The Commission feels that tax neutrality should be ensured across various avenues for long term savings for post retirement incomes so that the employees covered by NPS are not at a disadvantage. The Commission therefore recommends that withdrawals under the NPS should be tax-exempt to place NPS at par with other pension schemes. The Commission also recommends that the service tax levied at the time of annuity purchase by NPS subscribers should be exempted.

Note:

These recommendations apply only to government employees. However, these are only recommendations. It would be unfair to individual and corporate subscribers if NPS is made EEE only for government employees. I hope such a disparity does not occur.

You can also try the Seventh Pay Commission Calculator: Pay Fixation with Pay Matrix

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps