NPS may get new lease of life

In its recommendations to take NPS to the masses,the committee has said the minimum subscription required of subscribers should be slashed to Rs 1,000 from Rs 6,000 a year. It has also recommended that the Central Record-keeping Agency CRA charges be reduced significantly and fund management charges be revised up. The CRA charges stand at Rs 280 a year. For a customer who invests the minimum Rs 6,000,it turns out to more expensive than most other financial products. Once the charges come down,NPS would become a very competitive product and will attract much larger number of investors,says Hemant Beniwal,member,Financial Planners Guild-India. The committee has suggested that the NPS be marketed through the postal department,FMCG companies and telecom operators to leverage their vast reach. Dont be surprised if you see a slew of NPS advertisements on various media in future. Acknowledging that to sell any financial product,the intermediary must have some financial incentive,the committee said there is a need to retain a floor rate of Rs 20 and upper limit of Rs 50,000 on the incentive.

Tier I and II accounts

Under NPS two options are available for investments:

Tier I: The contribution for retirement savings would go into this account. This is a non-withdrawable pension account. The minimum contribution to an NPS account is Rs 6,000 per annum which can be done in instalments with minimum contribution per instalment being Rs 500.

Tier II: This is a withdrawable account with an aim to provide liquidity to NPS subscribers. The Tier II account would enable the existing Permanent Retirement Account Number PRAN holders to build savings over and above the investments in the Tier I account. An active Tier I account is a pre-requisite to opening a Tier II account.

There is a facility for transferring funds from Tier II to Tier I but not vice-versa.

Investment options

Unlike PPF and EPF,an NPS gives four different investment options.

Asset Class E equity market investments: The investment in this asset class would be subject to a cap of 50 per cent. This asset class will be invested in index funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index. These schemes invest in securities in the same weightage comprising an index.

Asset class G Government Securities: This asset class will be invested in Central Government bonds and State Government bonds.

Asset class C: This asset class is invested in credit risk bearing fixed income instruments like liquid funds of asset management companies,fixed deposits of scheduled commercial banks etc.

Auto choice 8211; Lifecycle fund: NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case you are unable/unwilling to exercise any choice as regards asset allocation,your funds will be invested in accordance with the Auto Choice option.

NPS also provides an option of choosing your fund manager. One can choose from any of the six Pfrda appointed fund managers: ICICI Prudential Pension Funds Management,IDFC Pension Fund Management Company,Kotak Mahindra Pension Fund,Reliance Capital Pension Fund,SBI Pension Funds,and UTI Retirement Solutions.

Experts believe that with Direct Tax Code coming in next year,NPS would become even more attractive. Current tax treatment of NPS is Exempt-Exempt-Tax EET,which would become Exempt-Exempt-Exempt EEE from next year. That is,withdrawals would be tax free too. NPS is an excellent product for retirement planning, says Dhirendra Kumar,CEO,Value Research.

The concept of retirement planning in India has for long been restricted to bank savings and the provident fund. Investors who are young and have the risk appetite should look at the equity option for the long term. This would ensure a good retirement corpus at the age of 60 years. Switching from one option to another is a great flexibility for investors, says AN Vinod,vice president and fund manager of Kotak Mahindra Pension Fund.

ritukant.ojhaexpressindia.com