The revised Direct Taxes Code, which will introduce several changes if implemented, has brought New Pension Scheme under the tax exempt net. This new change will make New Pension Scheme an attractive investment opportunity.
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 Direct Taxes Code.
Inspite of New Pension Scheme 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 1,000 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 (Rs 1 billion) set aside for this scheme. Thus, any New Pension Scheme subscriber will end up getting Rs 3,000 free from the government.
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Charges of NPS |
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Agency |
Service |
Charge |
Mode | |
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CRA |
Account opening |
Rs 50 |
Through cancellation of units |
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Annual maintenance charge |
Rs 350* |
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Per transaction |
Rs 10* |
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PoP (Max allowed) |
Registration |
Rs 40 |
Upfront payment | |
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Per transaction |
Rs 20 | |||
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Trustee bank |
Per transaction at RBI location |
NIL |
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Per transaction at non-RBI location |
Rs 15 |
Through NAV deduction | ||
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Custodian (on asset value) |
Asset servicing |
Electronic segment: 0.0075% a year: Physical segment: 0.05% a year |
Through NAV deduction | |
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Fund manager |
Investment management |
0.0009% a year |
Through NAV deduction | |
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Charges paid for starting NPS
New Pension Scheme has the lowest administrative charges and fund management charges. The fund management charges are capped at 0.0009 per cent and custodian charges in the range of 0.0075 per cent to 0.05 per cent.
To put this figure in perspective, pension fund managers will charge Rs 9 as fund management fee under New Pension Scheme for managing Rs 10 lakh (Rs 1 million).
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.
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NPS versus other investments | |||||
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NPS |
PPF |
EPF |
Mutual Fund |
ULIP | |
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Entry charges |
Rs 470 |
Nil |
Nil |
No entry load |
No entry load |
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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: New Pension Scheme last year gave around 14.8 per cent average returns. Public Provident Fund gave returns of about 8 per cent. 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.
The 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 up to Rs 1,00,000 is tax deductible under Sec 80C. Hence, as an investor one should look at this investment avenue now to plan your retirement savings.