NPS may become preferred investment for tax saving
September, 13th 2010
The New Pension Scheme (NPS) has so far not seen too many takers after the government opened the scheme to the public in 2009. However, the investment scenario will most likely change in favour of NPS once the proposals under the latest Direct Taxes Code (DTC) are implemented.
This is because the DTC has proposed to include NPS in the list of investments that are eligible for tax deduction under Section 80C. These developments make NPS an interesting investment avenue. This week, ET Intelligence Group brings you all that you would want to know about NPS. We will also discuss in length about the various schemes available under NPS and their performance.
NPS is a defined contribution scheme wherein an individual can open a tier I account and invest a regular sum of money till retirement. Professional fund managers manage funds invested under the scheme. At the time of retirement, investors can avail as a lump-sum a maximum of 60% of the total pension wealth generated by NPS over the years.
NPS now open to all citizens between 18-55 years
Originally started for central and state government employees, the scheme is now open to any Indian citizen between the age of 18 and 55. The retirement age is fixed at 60 years.
Individuals do have the flexibility to leave the pension system prior to age 60. The investor also has the option of opening a tier II account, which permits voluntary savings that can be withdrawn at any point of time.
But to be eligible to open a tier II account, one needs a tier I account.
The government has set up the Pension Fund Regulatory and Development Authority (PFRDA) to monitor the NPS. To open an NPS account, pick up the NPS registration form (UOS-S1) either from PFRDAs website or from point of presence (PoP). There are 22-registered PoPs that have authorised branches to act as collection points and extend services to customers. For a detailed cost structure, refer the adjacent table.
Once you submit the duly filled forms to PoP, Central Recordkeeping Agency (CRA) will process it and provide you with a permanent retirement account number (PRAN). PRAN will be the primary means of identifying and operating the NPS account. You will also receive a telephone password (TPIN) and an internet password (IPIN) to access your account.
At the time of registration, you need to make your first contribution to the plan. The minimum investment limit is Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at least once a quarter but there is no ceiling on how many times you invest during the year.
Swavalamban makes NPS attractive for investors
To make the scheme attractive to the lower strata of investors the finance minister has made an interesting proposal, Swavalamban.
Under this, the government will contribute Rs 1,000 per year for the next three years to each NPS account opened in the year 2010-11. But this is available for accounts with a minimum contribution of Rs 1,000 and a maximum contribution of Rs 12,000 per annum.
In case of failure to make payment, NPS account holders need to pay a penalty of Rs 100 per year along with the regular contribution outstanding to reactivate the account. Also, dormant accounts will be closed when the account value falls to zero.
Choice of investment
The NPS offers two investment options to invest. The first one is an active approach. Under this, the individual can invest in a pension fund approved by PFRDA. Currently, there are seven approved pension fund management companies floated by financial houses including LIC, SBI, ICICI, Kotak, Reliance, UTI and IDFC. Each of them provides few pension funds to choose from.
Under the active approach, you can also decide the proportion in which the sum will be invested in equity (E), debt (G) and balanced funds(C). While one can choose to invest entire pension wealth in C or G asset classes, only a maximum of 50% can be invested in E. A combination of all the three can be opted, for medium risk and return approach.
For those who find it difficult to select a pension fund, a second investment option of auto choice is available. Here, the fund is invested in the various asset classes based on the age of the pension account holder. Those who are young with highrisk return appetite will have higher exposure to equity. As the age increases this exposure reduces accordingly.
Remember choice of investment option and pension fund rests with you, so make your choice carefully. Though one can switch among the pension fund schemes and houses, a switch from active investment to auto investment or viceversa is not allowed.
Upon attaining 60 years, you can buy an annuity with a minimum of 40% of the pension fund and take the rest of the pension wealth as lumpsum. In case you wish to leave the pension system prior to age 60 then you have to invest 80% of the pension wealth in annuity schemes, while the rest 20% is taken as lumpsum.
You can purchase annuity from any life insurance company recognised by the insurance regulator Irda. In case of a demise of the pensioner, the lumpsum pension wealth available is given to the nominee. NPS is one of the most cost efficient investments.
The latest DTC proposals as and when implemented would make NPS a preferred choice of investment for tax saving.