In
India now social security is only guaranteed for govt. employees in
old age because only they are getting pension. Social security
should be guaranteed for all. For this purpose central govt. brought
New Pension Scheme ( National Pension Scheme) According to which any
Indian can open a Permanent Retirement Account Number. (PRAN) By
which he can invest for his retirement life.
In
order to monitor this entire scheme and its operation to protect the
interests of investor, a body is constituted named PFRDA (Pension
Fund Regulatory and Development Authority) under which another agency
for record keeping is created named CRA (Central Recordkeeping
Agency) which makes the pension fund operations transparent.
NPS differs from the existing pension scheme in the sense that
existing pension fund of Government of India offers assured benefits
while NPS has defined contribution structure where an individual can
decide where his contributed money will be invested. . Another
important difference being premature withdrawal is subject to few
life changing situations. Let's explore other aspects of this scheme.
Product Structure
The scheme is available in
two forms:
1. Tier-I account - Premature withdrawal
not allowed
2. Tier-II account - Premature withdrawal
allowed
Features
Until now the pension
schemes were available to Government employees and employees of big
firms who have provident fund facility. With NPS common man gets an
entry to the system. The other important features of the schemes are:
1. Low Cost - Annual
Fees of .00009% (90 paisa for Rs 10,000) for fund management
2. You
can choose from six different funds for investment
3. Withdrawing
from one fund and investing in another will not have any tax
implication
4. No upper limit on Investment
5. Minimum
limit of investment is 6,000 per year
6. Tax benefit over and
above the current limit of 1L under sec 80C
7. All citizens
between 18 and 55 years can invest in NPS
Taxation
Under the newly introduced
Section 80CCD (2), up to 10% of an employee's basic salary put in the
New Pension Scheme is tax deductible. If you fall in the 30% tax
bracket, the NPS investment under Section 80CCD (2) will reduce your
tax liability by almost 15000. Now onwards, NPS will be more
beneficial from the tax angle. From the next financial year,
contributions by employers to the NPS accounts of their employees can
be deducted as a business expense which was not allowed till now. As
such contributions will not be part of the Rs. 1 lakh tax deduction
limit under Section 80C, your employer's contribution on your behalf
will be a tax free benefit for you.
Fund withdrawal
Premature exits before
60 years' You will have to invest 80% of accumulated
wealth to purchase a life annuity from registered life insurer
' The
remaining 20% is liable for withdrawal as lump sum
Exits after 60
years' You will have to invest at least 40% of pension
wealth to purchase an annuity
No exits till 70
years' Beneficiary account will be closed and the
accumulated amount will be transferred in lump sum
In case of death of the
scheme holder nominee will receive the whole amount as lump sum.
NPS scheme on its
own vs. the one offered by the employer
If the employer is
offering NPS he will be making an equal contribution in the scheme
from his side. The structure will be of Tier-1 type where premature
withdrawal will not be allowed. You will be liable for additional tax
benefit on the employer's contribution.
Additional to above
structure individual can also choose a voluntary tier-II account
having premature withdrawal facility. Government and employers will
make no contribution into this account. The accumulated wealth in
this account can be withdrawn anytime without stating any reason.
Benefits to
investors
1. Additional tax
saving ' Both employers and employees will get tax exemption on their
contribution
2. Low cost of fund management ' The fund
management cost is very low, which will enhance the returns
3. Higher
return potential as compared to old plans ' As it's a defined
contribution plan, investors can choose from the 6 funds available
for investment for better returns. Rebalancing of accumulated
amount is free of cost so you can always invest in the best fund.
The Drawbacks
1. Tier 1 option
doesn't give much flexibility ' It's a rigid structure. A little
flexibility with respect to premature withdrawal would have made it
more lucrative.
2. Annuity rates post maturity is not fixed '
There is no floor rate decided so you cannot be sure of the returns
until maturity.
3. Fund management costs might increase in
future ' Depending on the pension liability and costs involved this
rate might shift northward.
4. Only six fund managers makes
it a risky proposition ' If we take into account the working
population of India this number seems to be pretty risky. As the
number of subscribers increase hopefully government will increase
this number.
How does employee
and employer benefit?
The scheme will benefit
both employees and employers a like when they participate. Employees
get tax deduction on their contribution and from next financial year
employers will be in a position to show their contribution as
business expense generating additional tax benefits for the firm.
Three
options are available to any investor . They are Option G: money will
be invested in central and state govt. securities . Which is
guaranteed by government. So very safe. Option C: it is to invest in
Corporate Bonds. Which is also safe to certain extent. Option E: to
invest in Stock Market index funds . Which is highly risky. But
investor has the freedom to select the option
