Personal Finance
Must Haves
Insurance
Family Budget
Bonds
Credit-Cards
Complete Guide for Investing in ULIP & MutualFunds
Loans
Gold
Banks and FD
Retirement
ICICI Investing Scheme
Post Office Schemes
Rules for Youngs
Pension Plans
| |
WITH
the launch of New Pension Scheme (NPS) comes the government’s
attempt to offer a first of its kind social security plan. The long
awaited plan was finally launched on May 1, 2009 after being in the
pipeline for five years. Wealth tries to answer
the 10 most commonly asked questions about this scheme.
Q1. What is NPS?
NPS is a pension plan where you can invest during your working years and
withdraw when you retire. Until May 1 2009, the plan was available for
central government employees only. But it is now thrown open to the
citizens of the country.
The current NPS launched is of tier-I type. The typical feature of tier I
type plan is that it does not allow you to make any withdrawals before 60
years. However, there can be exceptions in situations like a medical
emergency or buying your first house.
If you don't like the idea of this long lock in, you would need to wait
for the tier II type of fund, which is yet to be launched. D Swarup,
Chairman of Pension Fund Regulatory Development Authority (PFRDA), said in
an interview with CNBC TV18, "The tier II plan will be out before the end
of this year."
Q2. How does it work?
NPS works like a mutual fund (MF). If you want
to invest in the NPS, you can choose from three funds or a mix of funds:
Fund E: This invests up to 50 per cent in the
equity market
Fund C: This fund invests 100 per cent in corporate bonds
Fund G: This fund invests 200 per cent in government securities
If you are confused about how much to invest in which fund, you can leave
it to the auto selection option. Through this option, 15 per cent of your
money will be invested in equity, 45 per cent in
corporate bond and 40 per cent in government bonds.
However, after 36 years of age, your equity
and corporate bonds exposure will reduce, but it will be compensated with
higher investment in government bonds. The
maximum cap in government bonds will be 80 per cent. Equity and corporate
bonds will have 10 per cent each investment proportion.
Q3. Whom should I approach to
invest?
These fund are managed by six asset management companies (AMC): State Bank
of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance,
appointed by the PFRDA. Swarup says, "You have the liberty to choose,
change your fund manager every year unlike
mutual fund or unit linked insurance plans where you are tied to the same
fund manger throughout the term of the product."
All AMCs have to follow the guidelines laid out by PFRDA since it’s the
ruling authority.
Q4. How much can
I invest?
If you are investing in the scheme, you will
have to make a compulsory contribution of minimum Rs 6,000 annually or Rs
500 every month. Swarup, says, "You also have the flexibility to make
weekly contribution, but it would involve transition cost, hence it is
better to stick to minimum transactions."
The minimum age to enter the scheme is 18 years and the maximum is 55
years.
Q5. What about charges?
The best thing about this scheme is the fund management charge, which is a
bare minimum of 0.0009 per cent! That is nowhere close to the charges by
mutual funds or unit linked insurance companies
which range from 1.5 per cent to 2.5 per cent per annum.
The application form will cost you Rs 40 and for every transaction you
make, you will have to shell out Rs 20. Switching to another fund will
cost you another Rs 20. However, you cannot make more than one switch
every year. Apart from this, you will have to pay Rs 350 as annual
maintenance charge to National Securities Depository Ltd. (NSDL), which is
the central record keeping agency for all the individual pension accounts.
Just like the way you pay an annual charge in maintaining your demat
account, you will have to bear a cost for NPS too.
Q6. Do I get tax benefits?
Unlike retirement plan options, NPS doesn’t
offer tax benefits under section 80 C and that’s the biggest drawback of
the scheme. Currently, NPS falls under Exempt-Exempt-Tax (EET) system.
This means that the maturity benefits that you will receive at the
retirement stage will be taxable. However, Swarup assures that NPS will be
brought at par with other schemes sooner than later.
Q7. How will I be paid on retirement?
Payments will be made once you reach 60 years of age. A part of your
invested money will be paid out to you as
lumpsum, and the balance will be mandatorily kept back as annuity. This
annuity, which is the remaining amount left in your account, will be paid
out to you as pension every month or year depending on what you choose. In
case of your untimely death, your nomination will receive this pension.
Q8. Should I
invest?
Like any other scheme, NPS has its own advantages and disadvantages. When
compared to other retirement plan options such as employee provident fund
(EPF), NPS is a better choice. And the reason is that presently, EPF
gives 8 per cent interest rate. But if you invest in NPS, you can gain
better returns because of the equity portfolio of the scheme.
But compared to equity mutual funds, NPS has a major drawback: it
restricts equity to 50 per cent. Even if the fund management charges are
lower, We still recommends a mutual fund. "If one is voluntarily
investing in NPS, then he/she might as well
invest in the stocks or mutual funds (MF). It will give you better returns
and you have control over your investments too."
The main reason: NPS loses its charm when it comes to flexibility and
taxation, he explains. Firstly, in NPS your money is locked till your
retirement age unlike MFs that do not have lock-in period except equity
linked mutual funds. Moreover, annuity that you will receive at the age of
60 is taxable and so is the maturity benefits. Hence cautions
investors to wait for a while before hurrying to
invest in it.
Q9. Where can I
buy the scheme?
In order to invest in NPS, you will have to open an account with any one
of the 23 point of presence (PoP). The PFRDA has appointed
mutual funds, financial distribution firms,
insurers, banks as PoP.
Q10. What is the procedure?
1. Visit the nearest PoP to open the account
2. You will need residence proof, permanent account number, photograph and
other essential documents.
3. Once you have opened the account, you will get a permanent retirement
account number (PRAN) with internet banking access details.
4. You can then begin with your transactions and start
investing money
5. You will receive physical account statement every year that will carry
you transaction details, amount invested, etc.
The process is similar to opening a bank or a demat account.
|
