Thursday, May 14, 2009

What is New Pension Scheme


Private sector employees and self-employed people have got one more retirement planning option in the form of New Pension Scheme (NPS) which was thrown open on May 1.

Any Indian citizen who is between 18 and 55 can opt for NPS which promises better returns on your savings. You entrust your savings with the NPS Trust and its six fund managers who in turn invest the money in three different asset classes – equity, government securities and debt instruments.

There is not much fuss about getting a NPS account. Just approach a point of presence (PoP), submit the prescribed form with the required documents, and you are registered. Very soon, you will receive a Permanent Retirement Account Number (PRAN) by the Central Recordkeeping Agency (CRA) and there will also be a telephone and internet password to access your account over the phone and online.
NPS scores over schemes like PPF where there is a cap on the maximum investment in a year. Here, there is no upper limit, but the minimum amount you must invest is Rs 500 a month and Rs 6,000 a year. However, the investment should be done at least four times a year. You can select your fund manager at the time of first investment, you can also make a shift if you do not find the manager efficient enough, but this facility will be allowed after May 2010.
If you exit the scheme after you turn 60, you will get 60% of the invested amount as lump sum or in installments, depending on your preference. The remaining amount you need to use in buying a life annuity from an insurance company. But if you abandon the scheme before 60, you will get just 40% as a lump sum or in installments. In case of death of the subscriber, the nominee will receive the entire pension as a lump sum.
In comparison with Mutual Funds the NPS wins hands down in terms of charges that you will have to face. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.

While counting all the benefits of the NPS, you must also bear in mind that the returns are not guaranteed in this scheme. Also, there is not much clarity on tax benefits. As of now, one is eligible to get tax benefits under Section 80CCD of the Income Tax Act of India in this scheme. But unlike Employees Provident Fund and Public Provident Fund, tax will be levied on the withdrawal amount.
On the outset, it looks a good retirement option. But as it is said, ‘tread with care’.

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