Tuesday, July 13, 2010

National Pension Scheme NPS - A good investment option

The government is trying a lot to make National Pension Scheme, NPS popular with citizens. Recently, the government announced the ‘Swavalamban’ scheme through which it would add Rs 1,000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme in this financial year. Any NPS subscriber who invests Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get Rs 3,000 free from the government. Not bad at all!

Investors are actively waiting for the direct tax code. The revised DTC, if implemented without any changes, will keep the NPS out of the tax net. This new change will make the NPS an attractive investment opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation for NPS, which implies the NPS will be exempt from taxes at all the three stages of deposit, appreciation and withdrawal. Earlier, the NPS proceeds were taxable at maturity.

We definately recommend investors this investment opportunity and you don't have to wait for direct tax code to make it tax exempt. It is lucrative without that too. One of the major advantages is also the lowest fund management charge, which is Rs 99 per lakh (0.0009%) compared to charges of a pension plan offered by an insurance company, which is around 0.75-1.75% per year. The custodian charges are in the range of 0.0075% to 0.05%. This is also much lower than mutual funds and ULIPs.

There is a catch though. You have to buy a life annuity offered by life insurance companies. The NPS requires the investor to use the retirement corpus to buy annuities to avoid taxation. As per the existing stipulations, you have to invest 40% of the corpus in annuities.

You could wait for the direct tax code or invest immediately to take benefit of the ‘Swavalamban’ scheme to gain Rs. 3000.


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