The finance ministry on Wednesday stated that the tax exemption for contribution made towards one's pension fund would be increased from the prevailing annual Rs 10,000.

This would follow the introduction of the new pension scheme once the pension regulator was appointed by the end of the calendar year. No withdrawals would be allowed under the new scheme till the age of superannuation, which was likely to be pegged at 60 years.

The government is looking at existing depositories in the country to act as the central record keeping agency. This entity will keep the records of all individual account holders and with this, it will be possible to switch from one fund manager to another at no exit load. The CRA will also be responsible for accepting collections and forwarding the same to the respective selected fund manager.

The much awaited new pension scheme will favour a better tax treatment with contributions and accumulations being exempted from tax. "The tax treatment will be attractive with contributions and accumulations (investment returns) being tax exempt, and withdrawal being taxed," said U K Sinha, joint secretary, department of economic affairs in the ministry. He however, added that there would be an upper cap on the amount of contribution that was tax exempt.

The revenue department of finance ministry needed to reconcile other pension schemes so that one set of schemes were not at a disadvantage over others, added Sinha. He was speaking at a seminar - Indian Securities Market-New Benchmarks - organised by the Federation of Indian Chambers of Commerce and Industry.

Further to not permitting any withdrawals throughout the term of the pension plan, Sinha said that a certain percentage would have to be earmarked for buying an annuity plan. "This is to ensure that pensioners do not misuse funds wrongfully," said Sinha. Annuities would have to be bought from an insurance firm registered with the Insurance Regulatory and Development Authority, he said.

The government has decided to allow more than six participants to manage the funds under the new pension scheme. One of the key eligibility criteria for short-listing fund managers will be the charges. "Even if one charges one per cent more, it will make a lot of difference to the amount accumulated at the end of the term," said Sinha.

However, expecting limited initial contributions, Sinha said that a cap will be imposed to restrict the number of fund managers offering the product. "This is necessary to ensure against undercutting and mis-selling by the players," he added.

The proposed new pension scheme will be made mandatory for all central government employees and voluntary for the unorganised sector.

Responding as to how the new pension scheme is different from a mutual fund, Sinha said: "Mutual funds are for short and medium term investment. Here we are talking of a minimum 35 to 40 years."