Hemant G Contractor is the first Chairman of the statutory Pension Fund Regulatory and Development Authority. He joined PFRDA in October 2014; before that he was Managing Director of State Bank of India and served in several important positions in the bank that he had joined as a probationary officer in 1974. In an interview, Contractor talks about the National Pension System (NPS) that has been given a boost in the Budget. Excerpts:

Q. The Union Budget has provided new benefits to NPS subscribers. What are the changes that will be effective from April?

A. From 1 April, the National Pension System subscribers will get tax exemption on partial withdrawal of up to 25 per cent from their accounts. This will be in addition to the current exemption available on 40 per cent of the corpus at the time of final withdrawal when the subscriber reaches 60 years of age. Secondly, self-employed individuals have been brought at par with government employees in terms of deductions under Section 80CCD of the Income-Tax Act. The self-employed will now be eligible for a tax deduction of up to 20 per cent of the gross income, up from the current 10 per cent. The two changes, likely to be cleared by Parliament this month, are part of the Finance Bill in the Union Budget 2017-18.

Q. What is your subscriber base and size of the pension fund?

A. The number of NPS subscribers has grown substantially to 1.47 crore. The assets under management currently stand at Rs 1.67 lakh crore. Government employees, both central and state, account for the majority of the NPS subscribers. The other category is of private or self-employed individuals. In terms of subscriber base, the NPS has been growing at the rate of 40 per cent and 46 per cent in fund size. We plan to grow at the same rate this year and next.

Q. What is the average equity exposure of the NPS?

A. Equity allocation has been capped at 50 per cent for the private sector. In case of the government employees, equity exposure has been limited to 15 per cent. However, as of now, the average equity exposure for NPS stands at 13 per cent. It may go up in future.

Q. What has been the rate of return for the NPS?

A. NPS has been giving healthy return to investors. The average rate of return over the last five years has been a little over 10 per cent.

Q. The NPS has a big tax disadvantage vis-a-vis EPF and PPF. What does it mean for an investor looking to invest in a pension fund?

A. The NPS has a slight disadvantage as compared to Employees Provident Fund and Public Provident Fund. Both PPF and EPF have been enjoying the advantage of exempt, exempt, exempt (EEE) status, whereas the NPS remains an exempt, exempt, tax (EET) scheme. Our request to the government is that we should be placed at par with other such schemes. While the government didn’t entirely agree with our demand, it exempted 40 per cent of the corpus from tax last year. Earlier, the entire amount was taxed. The subscribers have to mandatorily use 40 per cent of the maturity corpus to buy annuity product. This amount is also tax free. So effectively, the tax paid is paid on only 20 per cent of the NPS amount. And if you put 50 per cent into annuity, the entire amount becomes tax free. People can get around this tax problem by judiciously managing their retirement fund.

Q. What are the steps being taken to popularise the NPS?

A. To make it easier for people to create a retirement corpus, we have made the process of opening NPS account simple and online since last year. The contributions can be made to the account via an app. We have also reduced the minimum contribution from Rs 6000 to Rs 1000 per annum. The PFRDA has launched a campaign through our distributor network to popularise it. We have also been training bank officials and post office employees engaged in selling the product. People can also join us as pension advisors to propagate the pension product.

Q. In the previous budget 2016-17, the government had provided an option to subscribers of EPF to switch to NPS. What has been the response like?

A. The switch has not happened till today as there are some statutory changes that are required in the EPF Act. Also the fact that the EPF is an EEE product and ours is an EET product, acts as a deterrent. It should be placed at par with the EPF to be able to attract more subscribers.

Q How does one subscribe to NPS?

A. We have subscribers from all strata of society. However, it is mandatory for the government employees who joined service after 1 January 2004. People from private sector can join the scheme using Aadhaar or Pan card as identity proof. The registration can be done on our website in 10 minutes.

Q. When are you inducting new pension fund managers?

A. PFRDA is soon going to announce names of nine pension fund managers. They have been selected on the basis of the variable price model. Six of them are existing ones and three will be new.

Q. What are the steps being taken to make NPS more attractive?

A. To benefit the customers, the PFRDA has recently allowed a second central record keeping agency, Karvy, in addition to the existing agency, NSDL. The competition ushered in by the entry of the second record keeping agency has led to a reduction in maintenance fee. Karvy, which will be fully operational from 1 April, will be charging an annual fee of around Rs 60, less than one-third of the fee charged by NSDL. With this, the old agency has also been forced to bring down the rates. The benefit will be passed on to the customers. NPS, which is already a very low cost scheme, will see rates going down further. The impact of the low fee structure on a person’s corpus would be quite substantial. One per cent reduction in fee would make a difference of Rs 20-30 lakh per account.