The National Pension System was tweaked for flexibility but awaits tax clarity

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Subscribe to enjoy similar stories. The latest tweaks to India’s National Pension System (NPS) improve an already excellent retirement saving scheme. The government could consider two additional improvements.

One, remove the age limits respectively for entering the scheme and for staying invested. Two, remove ambiguity on the taxability of the funds that remain in the NPS after the mandatory lump-sum to buy an annuity is taken out. The government introduced the NPS as a proactive measure to spare itself a pension burden that it would find hard to bear once the population has aged, reducing the proportion of those who work and pay taxes.

Paying the pensions of past employees from the taxes paid by current earners was clearly not sustainable. Under the NPS, pension is sought to be paid out of a saving corpus accumulated over the employee’s work life, with both the employer and employee contributing to it. The British government has such a system of funded pensions even for its armed forces personnel, with an added guarantee of a top-up from the exchequer, should the pay-out fail to keep pace with inflation.

India’s scheme is open to employees in the private sector and to self-employed individuals as well. All accounts are kept by a central record-keeping agency on a uniform platform. This brings down costs.

An employee’s retirement saving account remains the same, with a permanent retirement account number (PRAN), even if jobs are switched. Savers can invest in four different asset classes: equity, government bonds, corporate bonds and alternate investments. Savers can also choose their fund manager for each asset class.