The revised DTC which will introduce several changes, if implemented, would bring the New Pension Scheme (NPS) under the tax exempt net. This new change will make NPS an attractive investment opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation for NPS — exemption at all the three
stages of deposit, appreciation and withdrawal. Earlier, the withdrawals from the NPS were taxed. This brings it at par with the other long term investment avenues. Here is a brief snapshot of the product and also the impact of the change announced by the recently revised DTC.
Despite NPS being launched about two years ago, it has not been able to garner attention of the investor fraternity. Hence to promote it, the government has announced that it will add Rs 1,000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme. Those who invest Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get the additional fund allocation from Rs 100 crore set aside for this scheme. Thus, any NPS subscriber will end up getting Rs 3,000 free from the government.
Charges paid for starting NPS
NPS has the lowest administrative charges and fund management charges. The fund management charges are capped at 0.0009 per cent and custodian charges in the range of 0.0075 per cent to 0.05 per cent. To put this figure in perspective, pension fund managers (PFMs) will charge of Rs 9 as fund management fee under NPS for managing Rs 10 lakh. Compared to the charges of a pension plan offered by an insurance company, which is around 0.75 per cent to 1.75 per cent per year NPS charges are much cheaper.
However, there are other costs involved such as the cost of opening an account (Rs 50), annual maintenance charge (Rs 350) and a per transaction charge of Rs 10. Further one has to pay Rs 40 for registration and Rs 20 per transaction at points of presence. The charges would come down once the number of accounts opened increases. This is still cheaper than charges of mutual find and Ulips.
How to apply
Any Indian citizen between 18 and 55 years is eligible for the scheme. If you are interested in joining the scheme, then you need to visit a point of presence (PoP), which is authorised to service NPS customers. The list of these POPs are available at the Pension Fund Regulatory and Development Authority website.You can register for this scheme here by filling up a form and submitting relevant documents. After being registered, the Central Record-keeping Agency will allocate a Permanent Retirement Account Number for you, along with telephone and Internet passwords. If you invest monthly then the minimum investment is Rs 500, annually its Rs 6,000. You will need to invest at least once in four months with no upper limit for the invested amount.
NPS versus other investment avenues
NPS last year gave around 14.8 per cent average returns. PPF gave returns of about eight per cent. The lock in period of PPF is lower compared to NPS. It is 16 years and the chances of the saved money getting used for other purposes is high.
Also being only a debt investment, the returns are lesser than NPS, which allows you to invest some part of your savings in stocks which definitely enhances the returns in the long term. Further, in the case of NPS, at the time of maturity, one has to compulsorily buy a life annuity which will ensure a regular periodic income. Compared to mutual fund and Ulips, the returns from NPS are higher as the fund management charges and allocation charges being charged by it is lower. Revised DTC has paved way for a brand new NPS. With the tax abolishment during withdrawal, it is now on par with the other investment avenues. The monthly/quarterly contribution towards equity in NPS will assure Rupee cost Averaging and thus earn higher returns. Also investment up to Rs 1 lakh is tax Deductible under Section 80C. Hence, as an investor one should look at this investment avenue now to plan your retirement savings.
(The writer is CEO of bankbazaar.com. )