Currently, subscribers get Rs 50,000 deduction annually under the Income Tax Act for their NPS contribution over and above Rs 1,50,000 allowed under Section 80C.
The Pension Fund Regulatory and Development Authority (PFRDA) will roll out the world’s first minimum assured return scheme (MARS) by May-June next year under the National Pension System (NPS), guaranteeing 4-5% annual returns on the pension corpus for ten years, its chairman Supratim Bandyopadhyay told FE.
The minimum annual contribution for MARS would be Rs 5,000/annum and the upper age for subscribers would be below 50 years, keeping in mind the retirement age of 60, Bandyopadhyay said.
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Currently, the schemes under NPS do not guarantee any kind of returns or benefits as they are market-determined. Of course, the government-backed Atal Pension Yojana guarantees a minimum monthly pension of Rs 1,000-5,000 to the subscribers based on their contributions.
The guaranteed returns from MARS would be nearly half of the actual returns under the he market-linked NPS schemes and it would also come with a higher fund management fee. Because of the risks involved in guaranteeing returns, the fund management fee could be around 25 basis points (bps) compared with a maximum of 9 bps under other NPS schemes, yet lower than 150 bps charged by insurance companies for their insurance products.
Fund managers would have a solvency ratio of 1.5 (asset/liabilities) for MARS, meaning there will be requirement for them to infuse additional capital to run the scheme. No solvency ratio is prescribed under the market-return-based NPS schemes.
So, to make such a product attractive, the PFRDA will give the flexibility to fund managers in the investment ratio of the MARS corpus in government securities, corporate bonds and equities to generate higher returns over and above the guaranteed rate.
“In India or internationally, there is no product like this. We are going to give a basic return guarantee anywhere between 4% and 5% and all the upsides in market returns will go to the subscriber,” Bandyopadhyay said.
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The average returns on NPS corpus have been around 10% in the past 13 years for the central government and state government employees, who form the bulk of the subscribers’ AUM corpus (about 80% of Rs 8.5 trillion as of December 17, 2022).
Currently, subscribers get Rs 50,000 deduction annually under the Income Tax Act for their NPS contribution over and above Rs 1,50,000 allowed under Section 80C.
According to extant norms, at the time of exit from NPS, a subscriber gets 60% tax-free lump sum and the balance 40% must be used to buy annuities for regular income till death of subscriber and his/her spouse; thereafter, principal amount is returned to nominees. Similar benefits will be available for MARS too.
The product is being launched more than nine years after the PFRDA Act 2013 mandated the regulator to launch a MARS product. It took time as there was no such product globally for reference.
“Depending on the market response, the MARS scheme may be modified at a later stage,” Bandyopadhyay said.
After ten years, the corpus could be reinvested in MARS again at the prevailing minimum return guarantee rate or get invested in normal NPS schemes without guarantee at the choice of the subscribers.
The product will be open for subscription initially for non-government subscribers and will be extended to government employees after the Centre and States notify the product as an option for their staff.
In the past, the Comptroller and Auditor General of India had criticised PFRDA for not rolling out a MARS, in compliance with the provisions of the PFRDA Act. As per the Act, the subscriber shall have the option to invest his funds in such schemes providing MARS as may be notified by the Authority.
