Coming out of the meeting, Contractor said he'd made a case for EEE-status (meaning, exemption at all three stages of investment, accretion and withdrawal) for NPS, as against the present EET regime (exemption for the first two stages but taxation at withdrawal. EPF and the Public Provident Fund (PPF) are both having the EEE status; the maturity amount is not taxed at withdrawal either.
In the current year's Budget, Finance Minister Arun Jaitley
had made withdrawals from NPS on maturity tax-free up to 40 per cent of the total corpus; the balance 60 per cent continued to be taxable.
“Our emphasis was more on increasing the pension coverage. The EEE benefit for NPS was the major demand. We have digitised a lot of our facilities,” said Contractor.
The government is yet to amend the EPF Act to enable subscribers in the fund to shift to NPS, as was promised by Jaitley in the Budget for 2015-16. The amendment is stuck on a labour ministry demand that NPS subscribers be also allowed to shift to EPF, where there is presently a tax advantage.
At the outset, it seems NPS gives better returns even in debt instruments. For example, the EPF gave 8.69 per cent average annual return for the five years till 2016-17, while NPS gave a little over 13 per cent in the case of any of its schemes — equity, government debt or corporate debt. However, this is because of different accounting methods adopted by EPF and NPS. The former follows what is called the hold to maturity and accrual based accounting norm; NPS uses a market valuation norm.
For instance, if NPS and EPF buy a government security at a coupon rate of 6.5 per cent annually for 15 years, EPF will declare 6.5 per cent interest after the first year; NPS will take into account the decrease in interest rates. If because of the latter the securities turn five per cent more attractive, it would add this to the coupon rate and say the return is 11.5 per cent.
However, both NPS and EPF have to hold the security till maturity. So, for a subscriber, the security would actually give the same return. However, equity gives an added advantage to NPS. While government staffers may opt for an investment plan where 50 per cent could be invested in equity, private sector employers may choose one where 75 per cent could be used for equity. In EPF, only up to 10 per cent of the incremental fund could be invested in exchange-traded funds.
U K Sinha, chairman of the Securities and Exchange Board of India also gave suggestions for the equity markets. He did not elaborate on what he'd suggested. “A number of issues and areas were discussed...The market is being well regulated, I don't see any specific risk at this stage,” he said.
A day after asserting that tax revenues for the current financial year would exceed the Budget Estimate, the finance ministry painted a rosy picture of the macro economy after demonetisation.
Chairing the FSDC meeting, Jaitley said the world economy was fragile but India appeared much better placed, with improvement in its macro fundamentals. He said the government’s measures to eliminate the shadow economy and tax evasion were expected to have a positive impact on both Gross Domestic Product and fiscal consolidation in the long run.
Among other financial sector regulators, Reserve Bank (RBI) governor Urjit Patel and insurance sector regulator T S Vijayan attended the meeting. FSDC also reviewed the present status of non-performing assets in banks and measures taken by the government and RBI to address the issue.
Arvind Subramanian, the chief economic advisor, made a presentation on the state of the economy.