Dr. Sanjiv Agarwal
When it comes to social security measures, India is still considered to be an evolving country even after more than sixty years of independence. Central Government has announced a new pension scheme (NPS) w.e.f. 1st May, 2009 established under Pension Fund Regulatory and Development Authority. The scheme has been in operation for government employees since 2004 but has been only now opened to Indian citizens which will benefit all citizens, particularly those in private sector employment and those who are self employed.
The unique feature of the scheme is that it offers the flexibility to investors to select asset allocation as also their fund manager. Any person including non resident between 18-55 years of age can open a pension account through intermediaries which include banks and institutions like LIC, State Bank, ICICI Bank, UTI Asset Management Company etc.
New Pension Scheme
A person can open two types of pension account- with withdrawal and without withdrawal. While a minimum 10 percent would be allowed under withdrawal account, a person will have compulsorily withdraw atleast 40 percent of wealth on retirement (60 years). Balance can be withdrawal as a lump sum or in installments. The scheme envisages that in case of unfortunate death of member any time during the scheme, his or her nominee can opt to receive entire amount of pension wealth in lump sum or nominee can continue with scheme by subscribing to pension scheme in individual name.
The flexibility of investing the savings vest with the investors only. NPS offer two investment options. One is active choice (individual funds) which allow money to be invested in equity, credit risk bearing income instruments and government securities. The auto choice (life cycle fund) provides a mix based on age profile of member. Not only this, the investors can also choose their own fund manager form six options. The default choice would, however be auto choice giving a pre defined portfolio.
The scheme tempts one to save for retirement, more so for self employed and those employed in private sector, which does not offer post retirement benefits. The investment pattern would follow the general rule of investment, viz, high return- high risk and vice versa. The operation of the scheme would be simple for investors as investments would be managed by fund managers who can be selected by the investor himself and subscriber has to only decide to invest and choose his option . He can even exit from the scheme as per his will. So far as amount of investment is concerned, one has to decide the amount based on various factors such as age, future earning, taxation etc. While minimum investment has been pegged at Rs 500 per month or Rs 6000 per year, no upper limit has been fixed. Investors can decide upon the amount and frequency as per convenience. The scheme discourages defaults as non payment would attract penalty and reactivation charges. Not only this, the account will continue suffering expenses for corpus management which is nominal.
On tax front, while investment would entail deduction under section 80 CCD, withdrawal at the time of retirement would attract tax. This makes the scheme less attractive. However, Issuing Authority is pleading equitable tax treatment with PPF scheme outcome of which shall be known in near future.
The fundamental objective of the scheme is clearly to offer social security to the country men based on the scheme that one ought to save a certain amount for his welfare in sunset years which he gets back in the form of pension, at a time when his earnings deplete, but not the needs.
Investors have a choice to invest in NPS in three forms of investment ,ie, asset class of E,G or C.
|Asset Class||Type||Risk Return|
|C||Credit risk bearing||Medium|
The scheme operates on all India basis over 280 locations through point of presence service providers. The scheme gains authority from the fact that it will be a Government of India regulated scheme through Pension Fund Regulatory and Development Authority (PFRDA). The pension funds will be managed by specialized pension fund management companies from pool comprising of SBI, ICICI, IDFC, UTI , Reliance and Kotak Mahindra . Investors will have to select their fund manager while opening the account and it can be changed after a year, if investor so desires. NPS is a defined contribution scheme where in a certain amount will deposited till one retires. While the minimum investment would be Rs 500 per month or Rs 6000 per annum, it can be deposited in cash, chaeque or draft with chosen point of presence.
One good thing about NPS from regulating risk point of view is that the investments in stocks or equity are limited to sensex and nifty stocks only that would save large value erosion, provide check on market volatility and offer broader market based return . This would mean that investor may not get a return which is better than the market rate but it will ensure that the return is also not worse than the overall market rate. Unlike PPF or EPF, it does not guarantee fixed returns. What’s more, the inbuilt cushion of maximum 50 percent exposure in equities depending on your life cycle also helps . In auto choice scheme, investor’ age will decide the composition or mix of investment in class of assets. This would mean that more you grow older, your exposure to equities will gradually come down.
The attraction to NPS would depend upon tax benefits. Presently public provided fund (PPF) enjoys the status of EEE ,ie, all three- investment, income and redemption ? all are tax free. In case of NPS, the present provisions offer EET model wherein maturity proceeds on retirement would be subject to income tax. So far as new investment in NPS are concerned, it would be impacted by the fact that most of the taxpayers are already having therein investment commitments for the purpose of rupees one lakh deduction under section 80 C of Income Tax .
The Finance Minister in the budget announced that self-employed individuals can avail themselves of tax benefits under the NPS under Section 80 CCD of the Income Tax Act, 1961. Hopefully such benefits may make NPS popular.
Author: Dr. Sanjiv Agarwal, FCA, FCS, ACIS (UK) – Sr. Partner, Agarwal Sanjiv & Company, Chartered Accountants