NPS: At a Glance
SBI National Pension System is the most economical and least known
Government approved pension scheme for Indian citizens in the 18-60 age
group. It was launched by Pension Fund Regulatory and Development
Authority (PFRDA) in 2004. The minimum yearly contribution is Rs 6,000, which either can be paid in one go or in installments of at least Rs 500.
What is National Pension Scheme?
National Pension Scheme being the
cheapest market linked retirement plan among all other Retirement plans
(EPF, PPF and Mutual Funds) suggests that it would have recorded maximum
number of sales. But due to excessively less payment of
incentive/commission to the intermediaries, it is not getting promoted
by them.
The Scenario when the scheme was
launched was worse, the fund management cost was limited at 0.0009 per
cent and points of presence, or PoPs, where investors open the account,
were not permitted to charge more than Rs 20 per account, regardless of
how big the investment was. Then there was an account opening charge of
Rs 50 for the central record-keeping agency, or CRA, in addition to an
annual CRA fee of Rs 225.
The fund management fee for
non-government funds has now increased to 0.25 per cent and for
government funds it has increased 0.0102 per cent. Also, POPs are
permitted to charge Rs.100 plus 0.25 percent of the investment. This
change will surely act as an encouragement for the agents who will now
actively market the product.
Types of National Pension Schemes (NPS):
There are two types of accounts that NPS offers:
Tier-I Account
It is a basic pension account with limitations on withdrawal
*Before attaining 60 years of
age, only 20% of the contribution can be withdrawn while the rest 80%
has to be necessarily used for buying annuity from a life insurer.
Annuity is a series of payments made at fixed intervals of time .
Annuity plans necessitate the insurer to pay the insured income at
regular intervals until his death or till maturity of the plan.
*After attaining the age of
retirement also (60 years), close to 60% contribution can be withdrawn
and the rest 40% again has to be used to purchase annuity from approved
life insurers.
Tier-II Account
It is a voluntary savings option from which a person can withdraw money limitless.
Fund Managers
The individual/organization that takes
decisions regarding any portfolio of investment (mostly a mutual fund,
pension fund, or insurance fund), as per the stated goals of the fund.
It is necessary to opt for a fund manager while opening the account.
The money is managed by seven fund managers appointed by the PFRDA. The
government employees accounts are taken care of by one of the best
three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions, the money invested by others is managed by one of the six fund managers,
ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension,
Reliance Capital Pension, SBI Pension Funds and UTI Retirement
Solutions.
Mentioned below are the salient features of both Tier-I and Tier-II account
Costs Involved in National Pension Scheme
As discussed before the costs involved
are minimal, only 0.25% of the investment is paid to the intermediary as
fund management fee. Let us see how this cost is different from the
costs of the other leading pension plans.
Types of Funds in National Pension Scheme
Depending
on how open the investor is to risk, the corpus can be divided among
these three fund classes. Exposure to equity cannot be more than 50%.
However if the allocation is not specified, the exposure to various
classes, especially equity is decided on the basis of age.
The above figure also tells us about the average performance of National Pension Scheme funds in different classes.
The investment mix according to the age of the investor:
So with increasing age the investment corpus gets more inclined towards Debt
Pros and Cons of NPS
Pros:
Additional Tax Benefit:
The Finance Bill 2011-12 permits tax
deduction on contribution up to 10 per cent of basic salary and dearness
allowance (DA) made by an employer towards the national pension scheme (NPS) account
of an employee under Section 80CCE. This is over and above the Rs 1
lakh limit and is applicable if the contribution is done by the
employer. This is the reason why corporate houses are accepting NPS
happily.
There has been a hike in inquiries about NPS mainly because of the tax benefit under Section 80CCE.
Higher Fee to Intermediaries:
The fund management fee for
non-government funds has been raised from 0.0009 per cent of assets
under management to 0.25 per cent. The fee for government funds has been
changed to 0.0102 per cent from April this year
PoPs are allowed to charge Rs 100 plus 0.25 per cent of the investment, as against a negligible fee of Rs 20 previously.
The change is promoting New Pension Scheme
by offering incentives to distributors and fund managers. The fund
management fee of 0.25 per cent is nothing when compared to other
products.
Cons:
Tax on Maturity Proceeds:
There is confusion about taxation at withdrawal. According to the present laws the funds would be taxed at withdrawal.
Under the current laws, around 60 per cent corpus on maturity can be
withdrawn while at least 40 per cent has to be used to buy annuity.
Presently, returns from annuity insurance plans are not tax-free.
The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax
at withdrawal. However, it is uncertain if the DTC would allow tax
exemption on returns from annuity plans as well.
The tax at withdrawal stands in the way of making NPS the best pension scheme.
Mandatory Annuity:
Another lag is limitation on withdrawal
from Tier-I account, the primary account for pension savings. On
maturity also, one can withdraw only around 60 per cent funds; the rest
has to be used to buy annuity, the returns from which are not tax
exempted.
Even the annuity also has to be bought from one of
the six PFRDA-approved insurers. Options to choose from in case of the
number of annuity providers are anyway less with LIC commanding a 70 per
cent market share.
Low on Equity:
NPS portfolios are restricted to have
more than 50 per cent exposure to equity. It spells loss for people in
their 20s or early 30s, as equity has shown to offer 12-15 per cent
returns per year over long periods.
In comparison to traditional retirement schemes
such as EPF and Public Provident Fund, which refrain from investing in
stocks at all, NPS is the best as it is a lot more flexible in terms of
equity exposure.
So, investors wanting higher equity exposure
can go for equity mutual fund schemes such as large-cap funds and equity
exchange-traded funds.
In Comparison to its competitors; EPS and Mutual Funds, NPS leads by
*Scoring better in performance (refer to the investment mix table) and costs
*But the 40% necessary
investment in annuity after attaining the retirement age, 50% cap on
equity exposure and taxation on annuity returns does make NPS a not so
favorable option.
It is for the investor to decide as
performance and costs are good characteristics of NPS that make the
latter shine brighter than its expensive counterparts Such as Mutual
Funds.
Latest News - National Pension Schemes (NPS)
Budget 2017 Brings Relief to the Salaried Individuals Investing in NPS
Delhi, India, Feb 01:
With the release of Budget 2017, there is a relief for salaried
individuals investing in National Pension Scheme (NPS) through their
companies as they can now withdraw 25% of their handouts without paying
any tax. The Government has initiated some amendments in NPS under which
a part of withdrawal from National Pension Scheme is now Tax-free. This
initiative taken by the finance minister Mr. Arun Jaitley has brought a
major relief to the NPS subscribers.
The budget has eliminated the gap
between individual tax-paying employees and self-employed persons in
terms of income tax under section 80CCD. In order to grow the upper
limit of contribution to NPS from 10% of gross total income of a
salaried individual to 20%, the amendment of section 80CCD has been
proposed.
According to the sources, the amendment
will bring equality in tax treatment between the employee and
self-employee or non-salaried individual. The measures taken by the
government will come into action from April 1st 2018 and will be
applicable to the assessment year of 2018-2019.
