Comparison between New pension scheme, Insurance (ULIP Based) & Mutual Fund Pension Plans.

Comparison:

Any central government employee who joined the department after 01/01/2004 are already included in the New Pension Scheme. Those who joined before 01/01/2004 can join the New Pension Scheme from any POP-SP (eg Head Post Offices).

View A guide to New Pension Scheme.

NPS Costs:

What are the costs involved?

Transacting in NPS attracts both fixed and variable cost, which is deducted from the fund value.

Fixed cost:

• One-time account opening cost and issuance of PRAN – Rs 50

• Initial subscriber registration and contribution upload –Rs 40; Future fixed upfront charges – Rs 20.

• Annual maintenance charges – Rs 350

• Each transaction of NPS – Rs 10 The fixed cost adds up to Rs 470 per year.

Variable cost:

• Annual custodian charge - 0.0075-0.05 per cent of the fund value

• Annual fund management charge - 0.0009 per cent of the fund value

Advantages of NPS:

1. Cost - NPS is the cheapest among current retirement products and defined contribution schemes; It is also easy to transact in NPS.

2. Flexibility – The subscriber is given a PRAN, which will remain with him for forever. The account is portable irrespective of change in job/location.

3. 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:

1. 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).

2. 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.

3. 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.

comparison between the New pension scheme, Insurance Pension Plan (ULIP Based) and Mutual Fund Pension Plan.

NPS the cheaper and Tax Friendly Alternative:

	NPS	Insurance Plans (ULIP Based)	Mutual Fund Pension Plan
Investment amount per year	100000	100000	100000
Charges per Year (Initial Period)	925	13200	1250
Charges per year (5 Years to 10 years)	388	6000	1250
Charges per year (11 years to 15 years)	455	3000	1250
charges per year (16 years)	455	0	1250
Fund Management	0.0009 %	1.25 %	1.25 %
Age limit for annuity	60	Flexible	58
Assume CAGR	10 %	10%	10%
Maturity proceeds after 30 years	1.8 Crores	1.3 Crores	1.39 Crores
Lump sum (Max)	60 %	33%	0-100%
Pension Corpus (Min)	40%	67%	0-100%

NPS being the option with the lowest costs eats into the investments the least and hence delivers the highest returns.

The draft of the much awaited Direct Tax Code, which is expected to bring about a consolidation of the current tax laws and also effect some changes in the tax laws, has recently been made public.

With the drafts of the Direct Tax Code, there seems to be a decided push for making the NPS product more attractive to investors. The major change that the DTC will bring about in the retirement products scenario is that ULIPs will now also be taxed under the EET (Exempt-Exempt-Tax) Regime. This means that unlike in the current scenario, withdrawals from ULIPs will not be tax exempted. It has long been seen in the Indian investments market that the behavior of the retail investors is largely
guided by tax concerns. There is always a rush to invest in order to save on tax. ULIPs had an advantage over the NPS and mutual funds because it was taxed as EEE. This means that the withdrawal and is tax free too. Surely this is a major plus, but with the provisions in the new Direct Tax Code, the NPS will also be taxed in the EEE framework. This will invert the tax situation among retirement products with investment benefits.

NPS will be the only product to be taxed under EEE out of the three (Mutual Funds, ULIPs and NPS).

As a result, its major handicap will now be removed. The government has designed the NPS to benefit the investor to the maximum and the new taxation vis-a-vis the NPS will only add to the attractiveness of NPS.

Conclusion: NPS remains a very good product for its purpose and by aligning the distributors` interests with the PFMs would greatly help the NPS increase its strike rate. Re-iterating that NPS is a post-retirement safety tool,
it is a very effective tool that covers capital protection and also provides growth. With its lowest charges, it also is the cheapest way to get an exposure to the market. For the thousands and lakhs of employees in
the unorganized sector who have negligible or no post-retirement social security benefits, NPS is a boon.