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Top Indian companies and banks have found a smart way of putting more money in their employees' pockets without loosening their purse strings at a time the economy is witnessing a slowdown.
Some of India's largest companies are giving employees a choice to buy pension products offered under the National Pension System (NPS) to help them get higher tax breaks while building a bigger retirement nest. These include Reliance Industries, Reliance ADA Group, ICICI, State Bank of India, Wipro, Cognizant, ACC, Capgemini, Grasim Industries, Nalco and Konkan Railway Corporation, according to Yogesh Aggarwal, chairman of the Pension Fund Regulatory and Development Authority of India (PFRDA).
NPS, a defined benefit scheme, is mandatory for government employees who joined service from January 1, 2004, and voluntary for others. A customised version of the scheme was launched for corporates in late 2011, but the initial response was tepid.
Even now, most companies park the retirement savings of their employees with the Employees' Provident Fund Organisation (EPFO). However, EPFO is mandatory only for those who earn up to . 6,500 a month; beyond this it is voluntary. So, companies are now giving an option to their employees to opt for NPS. "An easy way for employers is to restructure salary packages of their employees without incurring any extra cost. Companies will save on expenses on self-administration of pension functions such as setting up a trust, record-keeping and fund management and so on," says Aggarwal.
An employee who joins NPS on his own can enjoy tax exemption on contributions to the scheme for up to 10% of his salary, with a ceiling of Rs 1 lakh a year. The exemption in this case is part of the widely used 80C ceiling under which Rs 1 lakh is reduced from income for calculating tax.
But a new provision introduced in a recent budget allowed additional tax saving for employers contributing 10% of their basic salary to NPS. Therefore, an employee with a basic salary of Rs 10 lakh can deduct a further Rs 1 lakh from his salary — over and above the 80C deduction — for the purpose of calculating tax, reducing the tax burden by an additional Rs 30,000 (30% of 1 lakh). The only catch is that a corporate has to be part of NPS for its employees to benefit.
This extra tax benefit is not available on, say, pension products sold by insurance companies. An employer can also claim tax break on the amount — subject to a ceiling of 10% of salary — contributed towards pension of employees as business expense.
Around 340 corporates have joined NPS, with over 1 lakh subscribers. Some companies have offered NPS as an extra social security cover over and above EPFO. The total assets under management (AUM) of NPS stood at Rs 24,687 crore in December 2012. Of this, the share of corporates is just around Rs 805 crore, or 3% of the total AUM. The numbers will go up dramatically if there is greater awareness at the senior management level. After all, it is for the company or institution to take a call on giving employees the choice to opt for NPS, given that it is a sound vehicle to accumulate a retirement corpus, offering superior returns than the EPFO. PFRDA, which oversees NPS, is now eyeing business from corporates contributing to employees' superannuation funds. A superannuation fund is a voluntary pension plan offered by an employer to provide an extra pillar of social security. It is managed by insurers such as LIC that provide annuities. At present, the amount received at superannuation is exempt from tax only when it is paid on death or on retirement.
At the meeting of the Financial Stability and Development Council (FSDC), chaired by Finance Minister P Chidambaram last week, the pension regulator made out a case for tax exemption on balances transferred from the superannuation fund to NPS.
The other major item on the budget wish-list is to make NPS tax-free at all stages — at the stage of contribution, during the accumulation phase, and at the time of maturity. These tax breaks, Aggarwal reckons, would draw more investors to NPS that competes with other pension plans. But Bharadwaj reckons that the tax treatment is not really the show stopper, and advocates better incentives for distributors at this stage. Last year, the regulator upped incentives for distributors. However, the total cost, including the management fee charged to pension fund managers, would not exceed 0.5% a year, making the cost-adjusted returns of NPS extremely attractive, says Aggarwal. The average returns of NPS outperformed the market at the end of September last year and stood at 14.52% for equities, 14.17% for corporate debt and 10.82% on government debt.
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