Provident Funds

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PROVIDENT FUNDS

Empowering the Employee Pension Scheme

The system of using competing professional fund managers, prudently liberalised investment guidelines, and improved governance covered in the previous chapter, should also be applied for pension funds. This will introduce specialised agencies for fund management (professional fund managers registered with SEBI) and for annuity provision (annuity providers registered with the Insurance Regulatory Authority).

The presently limited, assured returns should be replaced by market-determined rates of return.

The Government's contribution of 1.16% towards pension accruals should be gradually withdrawn over a period of maximum three years. In the interim, this contribution should be credited to the National Senior Citizen's Fund.

The vesting period for pensions should be 10 years. Breaks in contribution should be permissible - provided they are made up later with the correct interest penalty. Lump-sum topping-up by individuals, in case of a shortfall in the minimum contribution period, should be permitted.

Empowering the Public Provident Fund

The "Public Provident Fund" should be renamed "Individual Retirement Account (IRA)" to focus on its objective.

The provident fund system of using competing professional fund managers, prudent liberalisation of investment guidelines, and improved governance should also be applied to the Public Provident Fund. A professional Board of Trustees should be appointed to oversee the investment and administration of the fund.

The 10% tax on early and final withdrawals on provident funds should be applied to all permissible withdrawals from the PPF as well. As in the provident funds, this tax should not be levied on the portion of accumulations retained in the IRA for purchasing an annuity at age 60, or invested in approved instruments under Section 54E.

The rate of return should be market determined and there should be no tax on it.

The limit on the tax-free annual contribution should be raised to Rs.1,20,000, less contribution from an employer, if any. This would make the PPF equitable with PF (which allows Rs.60,000 tax-free contribution from the employee and a matching tax-free contribution from the employer. In fact, tax-free contribution from the employer could even be higher). This would remove discrimination in tax-treatment of self-employed persons vis-à-vis employed persons.

Branches of all commercial banks should be allowed to serve as PPF collection centres. A comprehensive publicity programme should be initiated to enhance awareness regarding the details and benefits of the revised scheme.

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