What is NPS ?
- NPS is a social security benefit offered by the government to target the majority of population that does not have/does not receive pension benefits from its employer.
- It is a defined contribution scheme (unlike EPF, PPF where returns are guaranteed by the government) regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
- The investment in NPS is to be maintained until maturity/retirement.
- Upon retirement, a part of your corpus will be allowed
to be withdrawn as lump sum, and the balance will be mandatorily paid out
as pension annuity.
Who
is covered?
- Any individual between the age of 18 years and 55 years
is covered. He could be a resident or a non-resident.
What
is the mode of operation?
Step -1:
- An individual needs to open an NPS account with one of
the NPS’ distribution agents (banks, post offices etc.).
- The individual will be offered 2 accounts – TIER I and
TIER II;
- TIER I is
mandatory for all individuals opening an NPS account. On opening an NPS
account, the individual is issued a Permanent Retirement Account Number
(PRAN). This number remains with the individual for his life, even if he
changes jobs/location. He would also be able to transact online.
Ok, but whats the difference between Tier I and Tier II
accounts ?
pehle Tier I ko vistaar
se dekh lete hai !
phir Tier II account kya hai ?
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Step-2: Once the account is opened, the
individual can choose the mode of operation of his/her account – which is:
manual or auto.
Under manual operation, he can choose the investment options as per his risk profile (alike a ULIP). There are 3 investment options –
Under manual operation, he can choose the investment options as per his risk profile (alike a ULIP). There are 3 investment options –
(a) equity.
(b) debt – government securities.
(c) debt – non-government securities.
Under auto operation, the funds will be invested up to 50% in equity by default and the rest in debt. As maturity approaches, the funds are gradually switched to debt option in order to protect the fund from market fluctuations.
NPS provides flexibility to subscribers where they can switch their pension funds among the three options and change fund manager if not satisfied with their performance.
Under auto operation, the funds will be invested up to 50% in equity by default and the rest in debt. As maturity approaches, the funds are gradually switched to debt option in order to protect the fund from market fluctuations.
NPS provides flexibility to subscribers where they can switch their pension funds among the three options and change fund manager if not satisfied with their performance.
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Step-3: The contributions made on regular basis would grow and accumulate over the years, depending on the efficiency of the fund manager.
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Step-4: On maturity, the individual has a choice to withdraw up to 60 % of the pension fund; Balance 40% is paid out by way of monthly pension.
Step-4: On maturity, the individual has a choice to withdraw up to 60 % of the pension fund; Balance 40% is paid out by way of monthly pension.
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What are the minimum and
maximum investments in NPS?
The minimum investment is Rs 6000 per year. There
is no upper limit on the maximum contribution per year. However, each
transaction done through NPS attracts cost (Rs 10 currently).
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What kind of returns
would the NPS generate?
- The returns would be higher
than traditional debt investments (such as post-office schemes, bank
deposits etc.) due to equity element in the investment.
- However, the risk will be
much lesser than equity-oriented mutual funds and returns generated by
investing in direct equity.
- This is because investment in
equities is allowed through index funds and exposure to equity has been
capped at 50%.
but yaar what is this index fund ?
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Advantages of NPS:
- Cost
- NPS is the cheapest among
current retirement products and defined contribution schemes; It is also
easy to transact in NPS.
- Flexibility
– The subscriber is given a
PRAN, which will remain with him for forever. The account is portable
irrespective of change in job/location.
- Returns
- The returns would be higher than traditional
debt investments (such as post-office schemes, bank deposits etc) due to
equity element in the investment.
Disadvantages of NPS:
- Taxability
- The contributions get tax
benefit under Section 80C. However, at the time of withdrawal, the lump
sum would be taxable as per the individual’s tax slab. It is a case of EET
(exempt on contributions made, exempt on accumulation, taxed on maturity)
unlike EPF, PPF which are EEE (exempt, exempt, exempt).
- Comparison
to mutual funds - Since the NPS is meant
for retirement and financial security, it does not permit flexible
withdrawals as are possible in the case of mutual funds.
- Returns - If an individual is voluntarily investing in
NPS, then he/ might as well invest in the stocks or mutual funds (MF). It
is the tax benefits that would make NPS an edge above other pension
products.
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But then why is NPS not popular ?
·
Because NPS offers very low
Commission to Fund managers (ICICI, SBI, UTI etc.)
·
The commission for selling NPS schemes
is just 0.25 per cent.
·
So those players (ICICI, SBI) rather
prefer to market their own pension, insurance, retirement plans rather than promoting
NPS among their (regular) bank customers.
·
Same goes for financial advisor,
insurance agents etc. They get more Commission by promoting
pension/insurance/retirement plans of private companies to their clients
compared to NPS.
Other
reasons
·
In NPS, there are multiple actors:
PFRDA, CRA and fund managers. NPS doesn’t offer uniform rate of return. Common
people find this setup difficult and unsecure, unlike tried and trusted LIC or
PPF.
·
Income Tax benefits under NPS are not
significantly higher than the existing investment options.
·
NPS is not spending lot of money on
ads with film stars / cricketers.
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Chalte Chalte ye bhi dekh lete hai
Swavalamban kya tha ?
- This
scheme is really for the financially less fortunate members of the society
and is really a way for the government to incentivize investments for
them.
- The
government pays Rs. 1,000 every year for four years, if you open a NPS
account under the Swavalamban scheme, but there are limitations on who can
open an account under the Swavalamban
scheme.
Following
conditions apply:
§ Subscriber is not covered
under employer assisted retirement benefit scheme and also not covered by a
social security schemes under any of the following laws:
§
Employee Provident Fund
and Miscellaneous Provision Act, 1952
§
The Coal Mines Provident
Fund and Miscellaneous Provision Act, 1948
§
The Seamens Provident
Fund Act, 1966
§
The Assam Tea Plantation
Provident Fund and Pension Fund Scheme Act, 1955
§
The Jammu & Kashmir
Employee Provident Fund Act, 1961
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Lekin yaar MODI SARKAR ne toh ATAL PENSION
YOJANA laayi thi na ....? woh kya hai phir ?
- Yes. Atal Pension Yojna was announced in Budget 2015-16 as an upgrade to the Swavalamban scheme, which will now fold into the new defined benefit pension scheme for the poor. Atal Pension Yojana (APY), will replace the previous government’s Swavalamban Yojana NPS Lite, which did not find much acceptance among people.
- The pension fund regulator will
administer the scheme, which is open to all unorganized sector workers who
currently do not avail of any social security scheme and have a bank
account.
Why this scheme?
- To give clarity of future benefits
to the subscribers—something that was missing in the Swavalamban scheme,
says a government note.
What is the product?
- It is a pension-oriented savings
product that gives a defined pension starting at age 60.
- It can be boarded from age 18 to
40 and exit is at age 60.
- The government will match half the contribution of the subscriber, or Rs.1,000, whichever is lower.
- If the subscriber saves Rs.800 in a year, the government will put in Rs.400. If the subscriber saves Rs.2,000 in a year, the government will put in Rs.1,000. If the subscriber saves Rs.3,000 in a year, the government will put in Rs.1,000.
- The monthly pension can be chosen
from between Rs.1,000 a month, at intervals of Rs.1,000,
and Rs.5,000 a month.
- The subscriber will get the
pension; on his death the spouse will get the pension, and when both die,
the nominee gets the corpus back.
- The annuity looks very much like
the Jeevan Akshay plan from Life Insurance Corporation of India with
the seventh option ticked.
Problems underlined by experts in Atal
Pension Yojana ?
- One, the interest rate on the
APY during the accumulation stage is 7.94 per cent a month. That is below
the current bank deposit rate.
- Two, at the withdrawal stage,
the interest rate is insultingly low - just 7.06 per cent. This scheme is
far worse than a bank recurring deposit scheme, even though the NPS will
invest in higher-yielding products like corporate bonds and a bit in
equities.
- Three, a pension of Rs
1,000-5,000 a month after 20 years is unattractive. After 20 years Rs
5,000 will be worth just Rs 1,292, assuming an inflation of seven per
cent.
- Four, the average life
expectancy in India is 67. It's worse among the poor. How long will
someone enjoy his or her pension after 60?
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Ok, then what experts want Jaitley to do in coming Budget
2016-17
To make Atal Pension Yojana more ATTRACTIVE !!
- It must earn a higher rate of
return, so that there is enough to go around for intermediaries as well as
contributors.
- This is possible by tweaking
just one aspect: investing a larger part of the money in index
stocks.
- This, along with a sensible
policy of allowing withdrawals and loans, exactly like the Public
Provident Fund, may work better than a lock-in.
To make NEW PENSION SCHEME more ATTRACTIVE !!
- If the government wants to encourage long-term equity investments, it must remove the anomalies and inconsistencies in the taxation of the National Pension System (NPS).
- Right now, the scheme is treated as Exempt Exempt Tax (EET). This is at a sharp disadvantage to the other major retirement products such as the Employees Provident Fund (EPF) and the Public Provident Fund (PPF). It is high time that the NPS too is given the EEE status in order to encourage retirement savings.
- The basic problem with EET is
that when an investor withdraws the corpus after retirement, he will be
taxed on it. At least 40% of the corpus will have to be put into an
annuity for a monthly pension. This pension will also be taxed as income.
The Kelkar report on tax reforms had recommended
that all investments (NPS, EPF and PPF) should be EET. This was actually there
in the first draft of the Direct Tax Code but obviously, it's politically
impossible to start taxing EPF and PPF withdrawals.
- The other argument for taxing
NPS was that it was a replacement for the existing system of pension for
government employees, in which pension is just post-retirement income and is
taxed like any other income.
- But this argument is untenable. The legacy pension system may be like a post-retirement salary but the NPS is a defined contribution product where the investor gets returns earned by his investments. This is similar to the EPF and the PPF.
- The Budget should, therefore,
just make NPS completely exempt, which will level the playing field for
all retirement products.