Article

Shifting from EPF to NPS still not possible

October 4, 2017
| India

Kulin Patel, Head – Retirement (South Asia), Willis Towers Watson

The Finance Act 2016 made a couple of small but significant additions to the Income Tax Act with respect to balance transfers from recognised Provident funds, and other tax approved Superannuation plans, being exempt when their transfer is to a member’s National Pension System account.

Over a year later, there are a number of reasons that have prevented a mass implementation driven by this development. The PFRDA published a circular in March 2017 informing the NPS subscribers of the process to be undertaken. However, this circular was more for the NPS subscribers and there still are last mile hurdles hindering private companies to undertake this initiative and offering it to their employees.

Employee Provident Fund

The immediate perceptions were that Employee Provident Fund could be transferred to NPS. However, this is not true. As it currently stands, it is only superannuation funds and any Provident Trust Funds that are outside the purview of EPFO. The fact is, there are hardly any “recognised provident funds” outside the purview of EPFO around anymore.

For mainstream EPF and exempt PF trusts to be able to offer the portability will require many more changes in the legislation – not to mention a much wider debate on the roles of PF and NPS in providing an avenue for savings and social security.

Corporate NPS or not?

Corporates will often embark on a decision on whether to offer corporate NPS to its employees, alongside the consideration of the portability initiative. Despite the NPS option typically being offered to employees as a choice within their flexible compensation tax components, the decision to offer NPS to employees is one that employers are taking time to consider. This also means there will be no additional cost to the company.

Why not both Superannuation and NPS?

Employers are also considering continuing the superannuation fund as employees can benefit from both the employer contribution to superannuation and the NPS employer contribution allowance in conjunction. Companies will take time to decide to offer both or only one. In a recent Willis Towers Watson Employer pulse survey, nearly 50% of the companies said they would consider offering both superannuation and NPS in parallel.

Bulk transfers

One incentive for companies to embark on the initiative is if they can transfer superannuation funds to individual NPS accounts and close their Superannuation Trust. However this will require the consent of employees. Notwithstanding any legal implications of employee consent and contracts - one needs forms filled and KYC documents to open NPS accounts. There is an implied consent due to this process. This can administratively prove to be a hurdle for employers. Moreover, there could also be legacy employee superannuation accounts where employees have not taken their funds when leaving the company in the past. Tracking those members will be challenging. Finally, the Trust might not be able to close the fund.

Costs

Corporates need to assess the cost of liquidation of Trust assets (assuming that transfer of securities is not possible given different investment regulations and absence of common valuation norms)’. Especially for insurance managed superannuation funds where there may be surrender penalties for bulk surrender. This will be a big disincentive. 

Trust documentation

Trustees will not be able to implement without changing their Trust Deed documentation to reflect the entire intent of the company in how they want to implement the portability.

  • Only when benefits become due (i.e. leaving the company)?
  • If portability is offered to current employees then the whole option window has to be written into the Trust and the fact that employees can “cease” membership and future contributions. This sounds easier than it is.
  • Will the company incorporate other changes and options into the Trust Deed?

Even if the Trust changes are made – they can’t typically be implemented until they have been approved by the Income Tax Commissioner where the Trust is registered. This can take months and relies on the aspect that there would be no other legacy approvals with the CIT.

There are opportunities for CBDT to help in removing the issue of time lag. For example, allow an implement and file approach rather than a file, approve and then implement process. This could be done if a blanket guidance can be given on sample text for changes to the Trust Deeds to cover the few critical points related to portability.

Next Steps

There is a need for stakeholders across the board to engage together so experiences and practical suggestions can be collected and shared with PFRDA and CBDT. One low hanging fruit would be a guidance from CBDT for companies and Trusts so they can implement the Trust changes more efficiently.

*First published in Financial Express