Government may make changes in National Pension Scheme (NPS) by year end

The Centre is set to make changes to the National Pension Scheme (NPS) by year-end. The goal is to ensure that employees receive a retirement payout of at least 40-45 percent of their last-drawn salary. This is based on the recommendations of a high-level committee that is currently examining the matter.

The pension issue has become a point of contention, especially in states under opposition rule. Many of these states have reverted to the old pension scheme (OPS). Under the OPS, pensioners receive monthly benefits equating to 50 percent of their salary at the time of retirement.

The NPS, introduced in 2004, operates on a market-linked model without guaranteed base amounts. This is unlike the OPS, which does not require employee contributions. In the NPS, employees contribute 10 percent of their salary, while the government contributes 14 percent.

The proposed adjustments to the modified NPS are likely to include changes in actuarial calculations. The aim is to provide higher returns for beneficiaries. Additionally, these adjustments seek to ensure a more balanced and optimized distribution of contributions within the pension scheme. This is intended to enhance the overall effectiveness and benefits for the stakeholders involved.

Under the NPS, retirees have the option to withdraw 60 percent of the accumulated corpus tax-free at the time of retirement. They can utilize the remaining 40 percent to purchase an annuity. The payments received from this annuity are subject to taxation.

Several states governed by opposition parties, such as Rajasthan, Chhattisgarh, Jharkhand, Himachal Pradesh, and Punjab, have opted to return to the OPS. However, economists caution that this move could potentially strain state finances. This could possibly lead to financial challenges for state governments.

In the current NPS, approximately 87 lakh federal and state government employees contribute 10 percent of their basic salary. The government contributes 14 percent. The ultimate payout is based on the returns generated by the fund, which is primarily invested in government debt instruments.

The OPS has faced criticism for being fiscally unsustainable. Soumya Kanti Ghosh, the group chief economic adviser of the State Bank of India, India’s largest lender, has expressed concerns that reverting to the OPS could worsen the debt burden of state governments.

The fiscal impact is a significant consideration, especially given the substantial pension budget of Rs 2.34 lakh crore allocated for the fiscal year 2023-24.