Open your New Pension Scheme account on or after April 1

The finance minister has made an interesting proposal to lure investors to the New Pension Scheme (NPS), which has found few takers so far.

“The government will contribute Rs 1,000 per year to each NPS account opened in the year 2010-11. This initiative, Swavalamban, will be available for persons who join NPS, with a minimum contribution of Rs 1,000 and a maximum contribution of Rs 12,000 per annum during the financial year 2010-11. The scheme will be available for another three years,” Mukherjee said in the budget.
On May 1, 2009, the Pension Fund and Regulatory Development Authority (PFRDA) had thrown open the scheme to all citizens of India.

NPS is a defined contribution pension scheme open to any Indian citizen between the age of 18 and 55.

Despite the scheme being in existence for almost ten months, the number of subscribers in the unorganised sector stood at 3,784 as on February 19, 2010.

“Out of an investor base of 1,500 individuals that I cater to, only 2 people asked me what this scheme (NPS) is all about after seeing advertisements. There are many people who don’t even know about the scheme,” Jayant Vidwans, president - Society of Financial Planners, said.

“It is one of the best products available, but the problem is nobody sells it. People will tell you NPS account is to be opened via banks. But if you go to banks to ask they don’t sell it, as they don’t get incentives. It is good for the customer, but bad for the distributor,” said Paul D’Souza, who runs the advisory Cuzinns Investment Services.

The Swavalamban scheme will be open for three years, which means the government will be investing Rs 1,000 into your NPS account every year for the next three years if you chose to open the account between April 1, 2010 and March 31, 2011. Thus, any NPS subscriber will end up getting Rs 3,000 free from the government. The government has allocated Rs 100 crore for this project in the next financial year.

This proposal is open only to the unorganised sector. Anyone not working for the central government, central government autonomous bodies or the state government has been categorised as the unorganised sector.

The problem
Other than distribution hassles, NPS is not a tax-efficient product as well. NPS by default sets the retirement age at 60. Once you attain that age, a maximum of 60% of the money accumulated can be withdrawn. The remaining 40% has to be necessarily used to buy an immediate annuity, which ensures a regular pension payment. However, unlike other tax saving instruments such as Public Provident Fund (PPF) and Employees’ Provident Fund (EPF), where in the amount at maturity is tax free, in case of NPS this amount is taxable.

Exempt-exempt-taxed
The government plans to introduce the new direct tax code starting April 1, 2011. The Finance Minister made this aptly clear in his budget speech. This will replace the Income Tax Act, 1961. Under this code, there is a stated intention of moving towards an EET (exempt-exempt-taxed) mode of taxation. Under this regime a taxpayer will be allowed an exemption when he invests money into a tax saving instrument and when he earns interest on it. But at maturity, the amount that he gets will be added to the income for the particular year and taxed accordingly. All the current tax-saving avenues like life insurance, Public Provident Fund etc are proposed to be brought under this regime of EET. NPS then will be become very competitive vis-a-vis other tax-saving instruments.

This will be primarily because the NPS has an annual fund management charge of 0.0009%. This is extremely low when compared to a pension plan offered by an insurance company charges a fund management charge of 0.75-1.75% of the value of the investment every year. To give readers a sense of proportion, even at the lower level of 0.75%, the fund management charge of insurance companies is more than 800 times more than that of the fund management charged of NPS.

Conclusion
If you want the Rs 1,000 investment from the government over each of the next three years, start an NPS account on April 1, 2010. Distributors though are not optimistic about the scheme.
“There has to be some intermediary to pull it. Instead of giving Rs 1,000 to each account holder, had the government given an introduction fee to the agent they would have canvassed the scheme,” said Vidwans.

D’Souza is equally skeptical. “A customer is getting mutual funds, insurance and other financial products at the door. Will he travel all the way to invest in NPS. The awareness is not there,” he said.