Investors prefer to wait it out long and hard before zeroing in on a scheme. It could be worth the wait. Post the new DTC, the new pension scheme (NPS) is now proposed to be under EEE (exempt-exempt-exempt) method of taxation. It means you get exemption at all the three stages of deposit, appreciation and withdrawal. This is now on par with other long term investments. Also, owing to the poor response for the product in the last two years after its launch, the government has decided to step in to make the product more attractive for investment by adding `1,000 co-contribution every year for the next three years.
Those who invest `1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get the additional fund allocation from `100 crore set aside for this scheme.
What is a NPS?
NPS is similar to mutual funds. You keep aside some money for your retirement and this money is put into the capital market. Hence, the sum which you will get post retirement will be dependent on the performance of the capital market.
Currently six fund houses — SBI Pension Funds Private Ltd, UTI Retirement Solutions Ltd, ICICI Prudential Pension Funds Management Company Ltd, Religare Pension Fund Ltd, IDFC Pension Funds Management Company Ltd, and Kotak Mahindra Pension Fund Ltd. — appointed by the government are available under NPS.
Schemes
Fund E: If you invest in this fund, then a portion of not more than 50 per cent of your investment will be put into equity. You should consider investing in this retirement plan only if your risk appetite is high as up to 50 per cent of your money will be linked to the performance of equity.
Fund C: Under this scheme, all of the money will be put into fixed income instruments like corporate bonds and government securities. You should consider investing in this fund, if your risk appetite is medium.
Fund G: In this fund, all of your money will be invested in government securities. Hence, this is suited for you if you want it to be an almost risk free investment. You can choose to invest in any of these funds or you can invest in a mix of these funds.
If you are not able to choose between these funds, your money will be invested in a fund with 15 per cent in equity, 45 per cent in corporate bonds and 40 per cent in government bonds.
Tips for investors
If you are planning to save for your retirement then you should avail NPS as the fund management charges are very low which is 0.0009 per cent compared to 1.5 per cent–2.5 per cent for mutual fund or insurance products.
The revised proposal in the Direct Taxes Code (DTC) to remove taxes on withdrawals from the New Pension Scheme (NPS) may boost its popularity, but the final norms that give a complete picture of the product are still awaited.
As compared to other retirement plans such as employee provident fund, the returns from NPS are better. Currently, EPF gives eight per cent interest rate. However, investing in NPS will earn you much better returns because of the equity portfolio of the scheme.
(Adhil Shetty, CEO, BankBazaar.com)