NPS Beats Mutual Funds On Long-Term Returns, Says PFRDA Chairman; Seeks Banks' Support For Expansion

National Pension System (NPS) investments can deliver better outcomes than mutual funds over the long term when tax benefits and the ability to switch between investment schemes without capital gains tax are factored in, Sivasubramanian Ramann, Chairperson of the Pension Fund Regulatory and Development Authority (PFRDA), said, making a strong pitch for banks to expand pension coverage through India's digital payments infrastructure.

Addressing senior bankers and financial technology platforms at the NPS Tatkal launch event, Ramann said PFRDA was looking to leverage India's UPI infrastructure to bring millions of people into formal retirement savings. He said the digital payments ecosystem could help pension adoption scale in much the same way that UPI transformed payments in the country.

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"We have done a detailed calculation of how does a person in NPS compare with a person in a mutual fund over a longer period of time, with the tax incentives," Ramann said. "The NPS actually comes out far better than a mutual fund for the simple reason that you can switch your schemes within NPS with absolutely no cost."

He said subscribers could switch between NPS investment schemes without incurring capital gains tax, while mutual fund investors could face capital gains taxation when switching. Tax becomes applicable when subscribers receive annuity income, which is taxed at their marginal rate.

The newly introduced NPS Tatkal facility allows customers to open pension accounts through UPI applications in three clicks, using existing bank KYC records. With about 80 crore people using UPI, Ramann said the banking system could become the principal distribution channel for expanding NPS.

"We are really hitting your database through existing flows, through the existing architecture. We don't need to create anything new," he said.

Ramann said banks could acquire NPS customers with practically no expenditure, while benefiting from deeper customer engagement and opportunities to cross-sell financial products. The annual commission available to points of presence is about 0.2% of assets under management.

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"We are saying that the banks should be able to take care of their customers within that particular commission," he said.

PFRDA expects NPS to attract four to five crore subscribers over the next two to three years through digital onboarding and wider awareness campaigns. The system currently has about 1.5 crore government subscribers and one crore non-government subscribers, while NPS and Atal Pension Yojana together cover about 10 crore people.

Addressing concerns about NPS liquidity, particularly for gig workers and informal-sector employees, Ramann said UPI could facilitate small and frequent contributions.

"Through UPI you can transfer Rs.10 on a daily basis, on an hourly basis. It's entirely up to you," he said, adding that there was no transaction charge under NPS.

Ramann said NPS was intended to complement, rather than replace, other financial products. "You need NPS because it is relatively illiquid. We don't want you to spend the money. We want you to save it. You need mutual funds because you get a return, but it is fully liquid," he said.

He said NPS assets under management, currently above Rs.18 lakh crore, could reach Rs.100 lakh crore by 2040 through organic growth. PFRDA's efforts to accelerate financial inclusion and pension awareness could help achieve the milestone earlier, he added.

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