Govt Offers NPS Gift

The expansion of tax slabs and the new infrastructure tax break offered in the Budget are some of the most beneficial steps from a savings perspective.

But one of the more interesting moves made by the Budget is the attempt to jumpstart the New Pension System (NPS). The NPS is the best way for small savers to build up some financial security for retirement. However, the scheme has proven difficult to market. In the absence of commission-earning agents, there’s no one to sell the NPS. Now, the finance minister has unveiled a truly innovative way of attracting lower-income
unorganized workers into the NPS. Instead of spending money on something like an ad campaign that will not reach the intended audience, the government has decided to give what amounts to a joining gift to this category of potential savers.

In what must be a first of its kind step, the government will basically give a gift of Rs 1,000 per year for three years to a certain category of NPS members. This scheme is open only to those who deposit less than Rs 12,000 per year and start their account in 2010-11. This is a brilliant instance of paying direct subsidy in a way that is designed to encourage people to save. Since this is a pension system, the money is not available till it’s usable as a pension on attaining retirement age. For a young person, this Rs 3,000 welcoming gift from the NPS would grow manifold till the time retirement comes. This scheme could well be the impetus that the NPS needs to do its job.

According to the finance minister’s Budget speech, this scheme is expected to pull in 10 lakh members into the NPS. That’s an expense of Rs 100 crore a year. If it creates a viral, word of mouth buzz about the NPS, then that would be money well-spent.

Of course, even with this joining bonus, NPS membership will still need some sort of a pull. Of course, it may still turn out that the only people who will join the NPS voluntarily will be those who are part of this scheme. It really may not be possible to get people into a financial scheme without either intense marketing or a mandatory framework. My hunch is that the NPS story is just beginning and this scheme will be one of the many things that will be tried before a satisfactory solution emerges.