New Pension Scheme benefits from revised DTC

Inspite of NPS being launched for the last 2 years, it has not been able to garner attention of the investor fraternity. Hence to promote it, the Government of India has announced that it will add Rs 1000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme. Those who invest Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get the additional fund allocation from Rs 100 crore set aside for this scheme. Thus, any NPS subscriber will end up getting Rs 3,000 free from the government.

 

The revised DTC which will introduce several changes if implemented has brought NPS under the tax exempt net. This new change will make NPS an attractive investment opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation for NPS – exemption at all the three stages of deposit, appreciation and withdrawal. Earlier, the withdrawals from the NPS were taxed. This brings it at par with the other long term investment avenues. Outlined is a brief snapshot of the product and also the impact of the change announced by the recently revised DTC.

Inspite of NPS being launched for the last 2 years, it has not been able to garner attention of the investor fraternity. Hence to promote it, the Government of India has announced that it will add Rs 1000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme. Those who invest Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get the additional fund allocation from Rs 100 crore set aside for this scheme. Thus, any NPS subscriber will end up getting Rs 3,000 free from the government.

Charges of NPS
Agency Service Charge Mode
CRA Account opening Rs 50 Through cancellation of units
Annual maintenance charge Rs 350*
Per transaction Rs 10*
PoP (Max allowed) Registration Rs 40 Upfront payment
Per transaction Rs 20
Trustee bank Per transaction at RBI location NIL
Per transaction at non-RBI location Rs 15 Through NAV deduction
Custodian (on asset value) Asset servicing Electronic segment: 0.0075% a year: Physical segment: 0.05% a year Through NAV deduction
Fund manager Investment management 0.0009% a year Through NAV deduction
* Once there are 1 million CRA accounts the annual maintenance charge will decrease to Rs 280 and per transaction charge to Rs 6. It will go down to Rs 250 and Rs 4 once there are 3 million accounts. Service tax and other levied as applicable
Source: PFRDA

Charges paid for starting NPS

NPS has the lowest administrative charges and fund management charges. The fund management charges are capped at 0.0009% and custodian charges in the range of 0.0075% to 0.05%. To put this figure in perspective, pension fund managers (PFMs) will charge Rs 9 as fund management fee under NPS for managing Rs 10 lakh

However, there are other costs involved like the Cost of Opening an Account (Rs.50), Annual Maintenance Charge (Rs.350) and a Per Transaction Charge of Rs.10. Further one has to pay Rs 40 for registration and Rs 20 per transaction at points of presence. The charges would come down once number of accounts opened increases. This is still cheaper than charges of mutual find and ULIPS.

NPS versus other investments
NPS PPF EPF Mutual Fund ULIP
Entry charges Rs 470 Nil Nil No entry load No entry load
Total charges (Custodian +FMC) Custodian charges: 0.0075% to 0.05%. FMC: 0.0009% Nil Nil 1.75% 1-1.5%

NPS versus other investment avenues

NPS versus PPF: NPS last year gave around 14.8% average returns. PPF gave returns of about 8%. The lock in period of PPF is lower compared to NPS. It is 16 years and the chances of the saved money getting used for other purposes is high. Also being only a debt investment, the returns are lesser than NPS as NPS allows you to invest some part of your savings in stocks which definitely enhances the returns in the long term. Further, in the case of NPS, at the time of maturity, one has to compulsorily buy a life annuity which will ensure a regular periodic income.

When compared to mutual fund and ULIPS the returns from NPS are higher as the fund management charges and allocation charges being charged by it is lower.

Revised DTC has paved way for a brand new NPS as with the tax abolishment during withdrawal it is now on par with the other investment avenues. The monthly/quarterly contribution towards equity in NPS will assure Rupee cost Averaging and thus earn higher returns. Also investment upto Rs.1 lakh is tax Deductible under Sec80c. Hence, as an investor one should look at this investment avenue now to plan your retirement savings.

 

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