Beginning May 1, 2009, the launch of the New Pension Scheme (NPS) has paved the way for the common man to secure his retirement. Unlike the pension scheme which was available only to the Central and State Government employees earlier, NPS is open for all where one can contribute on a voluntary basis. Therefore, post retirement you will get what you have contributed plus return that the fund manager generated.
It provides an opportunity to participate in the equity markets as well. This way, your corpus could grow at higher rate. Currently, the NPS trust has appointed six independent fund managers who manage the NPS corpus. You have the choice to select any of these fund managers based on their expertise, track record et al.
The tax treatment, at present, is on EET basis. Section 80CCD allows for a tax deduction for the amount invested in NPS up to Rs 1 lakh, within the overall limit available under Section 80C. The accretion to the corpus is fully exempt, whereas the money withdrawn from the scheme is liable for tax.
Dampeners
But NPS has not found many takers so far. The number of subscribers in NPS is still in thousands.
This is because a few factors work against the scheme. One, distributors have been uninterested in pushing the schemes because of low distribution cost — Rs 20 per transaction along with one-time registration fee of Rs 40. At some Point of Presence (PoPs) such as banks too, other pension products were being pushed when asked for the NPS form. Another big concern is that NPS is still a costly product for entry level depositors.
An investor depositing Rs 500 a month or Rs 6,000 a year will have to shell out about Rs 657 in the initial year and Rs 327 thereafter.
This effectively come out to 10.96 per cent initially and 5.46 per cent thereafter. Moreover, the current tax status i.e. EET (Exempt – Exempt – Tax) also acts as a dampener in comparison to other pension products i.e. the maturity proceeds would be taxed in the hands of investors.
However, the amendments effective November 1, 2012 brought in the NPS have addressed the issue of distributor disinterest. It has increased the pension fund management (PFM) fee up to 0.25 per cent, i.e. Rs 250 on an investment of Rs 1 lakh against Re 1 charged earlier. Therefore, distributors will get an incentive to sell the scheme now.
Efforts to gloss up
Two, with regards to the view that it is a costly product, the Government, claims that the charges would be reduced once the number of subscribers crosses 1 million. Three, the new Direct Tax Code (DTC) expected to be implemented could bring in EEE mode of taxation for NPS such as the PPF. That is, the maturity amount won’t be taxed in the hands of investors, making it more attractive.
(The writer is Associate Vice-President – Research & Advisory, Motilal Oswal Wealth Management. )