It is an important step in enabling a clear direction for providing stimulus to the pension landscape in India
Pension penetration is high on the agenda of the government. There was a clear direction towards strengthening the segment’s regulator, PFRDA, through various measures. While one would wait for the fine print to emerge, it is an important step in enabling a clear direction for providing stimulus to the pension landscape in India. Multiple regulators supervising pension products (annuities, retirement products offered by mutual funds etc. are governed by different regulators) lead to confusion and are an impediment to the growth of the sector.
Another key point announced was the separation of the NPS Trust from the regulatory body for government employees. There was a mention of a Pension Trust for employees other than those of the Government. This independence is very important for strengthening the level of governance related to managing the Trust and avoiding any conflict of interest with the regulatory role, thus bringing more transparency and benefit to subscribers. Further details would need to be studied to understand the implementation roadmap.
There was a third connected aspect relating to Universal Pension Coverage with auto enrolment (details yet to emerge) to help subscribers while moving from one job to another. This should help in protecting the retirement corpus. This strengthens the adequacy of the pension system. Auto enrolment addresses the inertia of people and forces savings to some extent, but it may not be enough on its own to increase savings.
Choice of income tax rates
A different tax structure was announced for Income Tax. As per the information available at this point in time, one would have a choice between the current tax regime and the new one announced. There are also restrictions in switching back from a selected tax regime. Further, there was also an announcement of rationalizing the exemptions from the current 100-plus to about 30 under the new regime. Some exemptions among Provident Fund, National Pension System and other saving vehicles from an employee and employer contribution may not be allowed.
The proposed tax structure does increase liquidity and is expected to boost domestic demand in the short term and may likely impact the savings/investment culture of the taxpayers of India. This gives more flexibility to the tax payer in deciding between having more in money in the hand and savings through the existing exemptions. The flexibility implies that a greater responsibility is needed in savings. The role of the individual in planning his or her financial wellness would be more critical and employers would need to play an enhanced role in “nudging” the right behavior towards saving.(The writer is India Business Leader – Health and Wealth, Mercer)