In the recent Union Budget, the finance minister said at one point that one of his measures "will enable India to become a pensioned society instead of a pensionless society". While budgets always come with some hyperbole, I wouldn't be surprised if this turns out be dead accurate. There are two simple changes in the budget that add up to a comprehensive rescue act for the National Pension System (NPS). These will also ensure that a large number of Indians will eventually retire with a much larger retirement kitty than they otherwise would have.
One, at long last, there is a tax-break for the NPS that is not shared with any other type of investment. Since a great deal of the investing behaviour is driven by tax-breaks, this new ₹50,000 deduction will mean that for a lot of people, ₹50,000 a year is now going to flow into the NPS. Eventually, given the higher returns that the NPS generates compared to other options will mean more savings by the time retirement comes.
The potentially much bigger change is that of allowing the NPS as an option to the EPF. It has long been clear that the NPS should replace the EPF. In his speech, Mr Jaitley said that the EPF has hostages rather than clients. By giving it as an option he will probably manage to avoid any strife. It's possible that in the beginning, relatively fewer people will opt for NPS. The difference in service standard between the two will be apparent from day one. However, as the years go by, the differential of returns between the NPS (with its equity component) and the EPF will become clearer and clearer. In five to seven years, it will become self-evident that one has to be really stupid to stick with the EPF.