Government to make National Pension System (NPS) more attractive with tax benefits
With the enactment of the Pension Fund Regulatory and Development Authority (PFRDA) Bill , the pension regulator is now planning to make the National Pension System (NPS) more attractive with tax benefits that would help expand its coverage.
A major drawback of the NPS is that it is under the exempt-exempt-tax (EET) system at present as against other retirement schemes under the Employees’ Provident Fund Organisation and insurance schemes that are tax exempt at all three stages — contribution, interest income and withdrawal.
But the PFRDA is hoping that the scheme will now be given a level playing field vis-a-vis other similar products such as insurance funds and the provident fund and be fully exempt from tax.
“We are hopeful that our long standing demand for E-E-E (exempt-exempt-exempt) tax treatment will be addressed in the Union Budget 2015-16 as it will make the scheme more attractive and benefit subscribers,” Hemant Contractor, chairman, PFRDA had said recently.
But for investors looking to save up a retirement corpus, the NPS can be a very good long investment bet. More so with stock markets on a bear run, the scheme also allows those looking for a higher return to invest a part of their portfolio in equities.
Returns on the NPS have been in the range of 8 per cent to 10.5 per cent (CAGR basis) by March 2014 (see chart). “Just about 8 per cent of our corpus from the NPS for government servants is invested in equities while about 15 per cent of the corpus from NPS for private citizens is invested in equities,” said RV Verma, whole time member PFRDA.
The NPS has a number of variants for different segments of the population. Different pension schemes include NPS for government servants, NPS for citizens of India (where subscriptions are voluntary), NPS for corporates (which is facilitated by a company for its employees) and NPS Lite or Swavalamban that is for low income group subscribers.
But on a whole, the schemes work on the same basis – anyone between the age of 18 to 60 years can apply for pension account. Each subscriber gets a Permanent Retirement Account Number based on which they can make contributions and track their investments. Investments are broadly made in three categories of government securities, corporate bonds and equities, but the portfolio and choices allowed vary from scheme to scheme.How the NPS works:
How the NPS works:
Started in 2009, the NPS for private citizens is a purely voluntary choice where investors between 18 to 60 years of age can apply for a pension account with one of the 64 intermediaries or points of presence for the scheme.
Once the subscriber is enrolled, he is given a PRAN, a telephone password as well as an Internet password. Each subscriber under the scheme gets two accounts – a Tier I account for contributions for retirement savings, which is non-withdrawable and a Tier II account that is a voluntary savings facility and allows for withdrawals whenever the subscriber chooses.
Contributions to the NPS too are extremely reasonable. While each subscriber has to make a contribution of Rs 500 at the time of opening the account, a minimum annual contribution of Rs 6,000 is mandatory in a Tier I account. The account gets frozen in case the contributions fall below this but can be reactivated with payment of a Rs 100 penalty. The investment in the NPS for private citizens gives you two options on how to manage the portfolio. Subscribers can also choose from seven pension fund managers to manage their retirement savings. Under the Active choice, subscribers can actively choose their portfolio based on a mix on government securities (G), corporate bonds (C )and equities (E).While upto 100 per cent of the corpus can be invested in C and G, a maximum of 50 per cent of the corpus can be invested in E class. The Lifecycle choice or auto choice is an investment option where in the investment portfolio is allocated by the fund manager based on the age of the subscriber through a pre-defined portfolio. What this means is that younger the investor, more is the allocation in equities while the mix of government security and corporate debt increases as the investor nears the age of withdrawal.
Exit from the NPS: Exit from the scheme is permitted only at 60 years of age where in at least 40 per cent of the accumulated pension wealth of the subscriber needs to be utilised for purchase of annuity providing for monthly pension and balance is paid as lump sum payment to the subscriber. Alternatively, the subscriber can defer the payment of the lumpsum amount to the age of 70 years. For an early exit, 80 per cent of the corpus would still have to be utilised for purchase of an annuity. In case of death of the subscriber, the whole corpus is transferred to the nominee.
Costs Costs for management of funds and account records are kept at a minimal. While account opening charges are Rs 50, annual maintenance cost for account records is Rs 190, which a repaid to the central record keeping agency (CRA).The point of presence charges Rs 100 for initial subscriber registration and 0.25 per cent of the initial contribution amount as the initial contribution upload. The fund manager charges an annual investment management fee of upto 0.1 per cent of the average monthly assets it manages. The point of presence charges Rs 100 for initial subscriber registration and 0.25 per cent of the initial contribution amount as the initial contribution upload. The fund manager charges an annual investment management fee of upto 0.1 per cent of the average monthly assets it manages.