New Delhi: The appeal of the National Pension System (NPS) is fading as the new tax regime gains traction, resulting in a notable decline in retirement advisory services. Experts point to low distributor incentives and the growing preference for tax benefits in new structures as contributing factors. With only 63 registered retirement advisers (RAs) facing challenges, pension agents offer a new model, but the overall demand remains sluggish amid structural hurdles.
The Cooling Interest in NPS
The NPS, once touted as the ideal retirement solution for many Indians, is now losing its charm. Industry experts have flagged a decrease in interest largely attributed to the appeal of the new tax regime, which offers little benefit for contributions to the NPS. Weak distributor incentives have also hampered the spread of retirement advisory services, making it increasingly challenging to attract clients.
As of now, only 63 retirement advisers (RAs) are actively operating under the Pension Fund Regulatory and Development Authority (PFRDA). Those few have low client engagement; one notable case is Aarathi Rajgopal, who earned her RA license with enthusiasm but hasn’t yet managed to service a single client. Her experience highlights a significant barrier in the industry: low monetary incentives. For instance, if a client invests ₹10 lakh in NPS, Rajgopal can charge a maximum of ₹200 as an account-opening fee and an annual advisory fee of only ₹1,000. In contrast, if that same amount were invested in equity mutual funds, her earnings could balloon to around ₹8,000 annually, demonstrating a substantial financial incentive disparity.
Rajgopal decided against renewing her RA license this January, instead opting to guide clients directly to central recordkeeping agencies (CRAs) for NPS investments. This scenario illustrates a broader trend in the industry, where financial advisers are gravitating toward more profitable ventures due to insufficient rewards within the NPS framework.
The Shift to a New Tax Regime
Data from the Central Board of Direct Taxes reveals that a stunning 72% of taxpayers opted for the new tax regime in 2023-24, further complicating the NPS landscape. “The NPS used to sell like hot cakes, but with more people adopting the new tax regime, it’s no longer a popular choice among clients,” notes Makesh Sivasankar, founder of SAMISH Investment Services.
Under the previous tax framework, taxpayers could claim deductions of up to ₹1.5 lakh on NPS contributions under Section 80C, in addition to ₹50,000 under Section 80CCD(1B). Many clients routinely channeled ₹50,000 annually to reap those benefits. However, under the new regime, these deductions vanish, significantly diminishing the NPS’s appeal.
While employer contributions to NPS remain tax-deductible—up to 14% of basic pay—this is an option primarily beneficial to government and private sector employees. As a result, platforms like PensionBox are shifting efforts towards corporate partnerships, rather than focusing on individual retail clients. “The retail side of the NPS will take a hit going forward,” says Kuldeep Parashar, CEO and founder of PensionBox, signaling a strategic pivot in the face of evolving market dynamics.
Pension Agents: A New Approach
To tackle the declining interest in NPS, the PFRDA introduced a new framework in 2024, allowing individuals to work as pension agents. Unlike RAs, these pension agents operate as intermediaries for NPS Points of Presence (PoPs), streamlining compliance by eliminating the need for direct registration with the regulator. The revised model sets fixed fee structures, incentivizing agents through revenue sharing with PoPs.
For example, a PoP might charge a maximum of ₹400 to open a new account and offer a commission of 0.50% for new contributions, capped at ₹25,000 per client. Yet, Parashar warns that both PoPs and pension agents are confronted with similar hurdles regarding low monetary incentives, complicating wider adoption.
Additionally, due to the complexity of NPS’s rules regarding withdrawals and annuity options, selling NPS products at scale requires considerable diligence, which is challenging under the current remuneration structure. “Since it was never actively marketed, it also couldn’t achieve top-of-mind recall as a retirement solution,” observes Santosh Navlani, COO of ET Money. The NPS has transformed from a ‘pull’ product—something that attracts customers—to a ‘push’ product, necessitating increased effort from promoters to sell the offering.
Looking Ahead: What Needs to Change?
Experts like Harsh Roongta, a registered investment adviser, consider long-term pension products inherently challenging to market without compelling incentives or regulatory mandates. “For government employees, the mandatory contributions ensure participation. For the private sector, the tax breaks on corporate deductions help. But beyond these groups, the NPS remains a hard sell for the general public,” he remarks.
Roongta suggests the government explore options allowing employees to choose between the Employees’ Provident Fund (EPF) and NPS, potentially boosting adoption rates. Meanwhile, Parashar advocates for restructuring the commission model, proposing the distribution commission should be tied to the total assets under management (AUM) rather than the contributions, akin to the 401(k) and Roth IRA models in the U.S.
As experts stress, while the NPS aims to foster substantial retirement savings, the current landscape underscores the need for structural reforms to enhance incentives and promote wider adoption. “The goal is to keep costs low and aid clients in building a meaningful retirement corpus,” confirms Sriram Iyer, CEO of HDFC Pension. As the retirement savings landscape evolves, the NPS must adapt or risk fading into the backdrop of India’s financial services sector.
💡 Bankerpedia’s Insight
The decline in NPS popularity, driven by the rise of the new tax regime and insufficient incentives for retirement advisers, signals broader implications for India’s banking and finance sector. As fewer individuals engage with NPS, institutional assets may stagnate, impacting financial stability and retirement readiness. This underscores the need for better marketing and incentive structures. For individuals, it’s essential to explore diverse retirement options, weighing the merits of NPS against other investment vehicles to ensure future financial security. Engaging with financial advisers remains crucial for informed decision-making.
🤔 What Does This Mean for Me?
- Salaried Person → Reduced NPS appeal may impact retirement savings strategies.
- Business Owner → Reduced retirement investment appeal may hinder client growth.
- Student → NPS’s declining popularity may limit future retirement options.
- Self-employed → Reduced NPS incentives limit retirement planning options for self-employed.
- Homemaker → Retirement savings options may diminish for homemakers.
- Retiree / Senior Citizen → Reduced retirement planning options and potential income instability.
- Job Seeker → Less interest in NPS affects retirement planning options negatively.
- Farmer / Rural Citizen → Reduced retirement options and benefits for rural citizens.
📚 Research References
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