The possibility of returning to the old pension scheme is not financially feasible, according to T.V. Somanathan, the Union finance secretary and head of the committee reviewing changes in the National Pension System (NPS). Somanathan’s statement follows Union Finance Minister Nirmala Sitharaman’s Budget 2024 announcements that emphasised the government’s commitment to addressing key concerns related to taxes and investments while maintaining fiscal prudence.

Also Read: NPS Vatsalya: Another Option To Plan Your Children’s Financial Security; Know The Key Features

“We have had four rounds of consultations with our staff associations through the National Council of Joint Consultative Machinery. We have understood what the core concerns are,” Finance Secretary Somanathan said in an interview with NDTV.

He stated, “One thing that I can say as the head of the committee—I can’t speak for the government on this—is that a return to the old pension system is completely not feasible financially. It will be a disaster for those citizens of India who are not government servants. It may be desirable for one class of people, but it will be a disaster for the rest, so that is not feasible.”

What Are The Core Concerns The Committee Is Working On?

Finance Secretary Somanathan highlighted the following three primary concerns raised during consultations:

1. Assurance of Pension Amount: Employees desire a guaranteed pension amount, independent of market fluctuations.
2. Protection Against Inflation: The scheme has to ensure that pensions have some form of inflation protection.
3. Minimum Pension: Introducing a minimum pension for those with service periods falling short of the guaranteed level.

“We will find a way to address these concerns to a satisfactory level, keeping fiscal prudence in mind,” he added.

Budget 2024 Announcements: Strengthening Social Security Via NPS

In line with these objectives, the Union finance minister made two key announcements in Budget 2024 to boost the social security benefits:

Increase In Employer’s NPS Contribution To 14%

Earlier, under Section 80CCD(2), central and state government employees could claim a deduction of 14 per cent of their salary for employer contributions towards their NPS accounts, while other employees were limited to 10 per cent. The new budget proposes to extend the 14 per cent deduction benefit to all employees, including those in the private sector and public sector banks.

This move aims to make NPS more attractive to a broader range of employees and incentivise a shift to the new tax regime. The increased deduction would mean more tax savings for individuals, thereby contributing to their retirement goals. For example, an employee with a basic salary of Rs. 100,000 will see their annual tax savings increase from Rs. 24,960 to Rs. 34,944 if they fall in the 20 per cent tax bracket under the new tax regime.

In snapshot, this policy change provides dual benefits:

– Higher short-term tax savings

– A larger retirement corpus in the long term

Also Read: Budget 2024: Employers’ Contribution In NPS Hiked To 14%; What It Means For Subscribers?

Introduction of NPS Vatsalya for Minors

The finance minister also introduced NPS Vatsalya, a new plan designed for minors. Parents and guardians can contribute to an NPS account for their minor children.

Upon reaching adulthood, the account seamlessly converts into a standard NPS account, providing a strong financial foundation and encouraging continued investment in the NPS.

Ranbheer Singh Dhariwal, chief executive officer, Max Life Pension Fund Management, says, “By allowing parents and guardians to initiate their minor child’s NPS account, the initiative sets the foundation for responsible financial management from an early age. As these accounts transition into regular NPS plans upon adulthood, they provide a smooth continuation of savings habits into adulthood.”

Balancing Social Security and Fiscal Responsibility

The government’s approach aims to balance the enhancement of social security with fiscal responsibility. The refusal to revert to the old pension system, while discouraging for some, underscores the commitment to fiscal prudence according to the finance secretary.

The government aims to address employee concerns through sustainable modifications to the new pension system as announced in the Finance Bill 2024.