Context: 

Over two lakh employees under the National Pension Scheme (NPS)  in Karnataka are set to approach the Seventh Pay Commission with their demands, after launching a series of campaigns to bring pressure to scrap the NPS.

About National Pension System (NPS):

• • Under the NPS, the individual contributes to his retirement account and also his employer can also co-contribute for the social security/welfare of the individual.
  • NPS is designed on Defined contribution basis wherein the subscriber contributes to his account, there is no defined benefit that would be available at the time of exit from the system and the accumulated wealth depends on the contributions made and the income generated from investment of such wealth.
  • The greater the value of the contributions made, the greater the investments achieved, the longer the term over which the fund accumulates and the lower the charges deducted, the larger would be the eventual benefit of the accumulated pension wealth likely to be.
  • NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account.
  • Eligibility: Resident as well as non-resident Indians in the age group of 18-60 years can invest.
  • Regulator of NPS: Pension Fund Regulatory and Development Authority (PFRDA)
    • PFRDA is an authority set up by the Government of India through the PFRDA Act 2013 to promote old age income security by establishing, regulating and developing pension funds to protect the interest of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.
  • Tax Benefits:

• • • Employee Contribution: Deduction upto 10 per cent of salary (basic+ DA) within overall ceiling Rs.1.50 Lakh u/s 80C.

• • • Voluntary Contribution: Deduction upto Rs.50,000 u/s 80 CCD(1B) from taxable income for additional contribution to NPS.
    • Employer Contribution: Deduction upto 10 per cent of salary (Basic + DA) from taxable income u/s 80 CCD(2). This is over and above the limits u/s 80C.

Why the shift to NPS was undertaken? 

• The shift to NPS was undertaken due to concerns over the coverage, sustainability, and scalability of the old pension framework.
• As per the research carried out in the early 2000s, India’s implicit pension debt, owing to central (civil) employees, state government employees, and the funding gap of the employees pension scheme, was reaching unmanageable, unsustainable levels.
• Moreover, this framework only benefited a tiny portion of the total labour force.

Old Pension Scheme (OPS):

• Pension to government employees at the Centre, as well as states, was fixed at 50 percent of the last drawn basic pay.
• Income under the old pension scheme doesn’t attract tax
• Only government employees are eligible for receiving a pension after retirement
• It promised an assured or ‘defined’ benefit to the retiree. It was hence described as a ‘Defined Benefit Scheme’.
• For example, if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000. 

Concerns with the OPS:

• Pension liability: The main problem was that the pension liability remained unfunded, that is, there was no corpus specifically for pension.
• Ever-increasing benefit of pensioners: The OPS was also unsustainable. For one, pension liabilities would keep climbing since pensioners’ benefits increased yearly. 
• Intergenerational equity: Today’s taxpayers pay for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels. 
• Even worse for States: If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts. 

Source: The Hindu, Indian Express