New Pension Scheme – Comparisons – Dos & Donts

New Pension Scheme (NPS) – Comparison with EPF, PPF & Insurance Linked Pension Plans & DOs & DONTS….!!!

If you don’t know much about the New Pension Scheme (NPS) launched by government of India few weeks back than please the following Articles in detail Following articles will give you basic guidelines about the NPS.

NPS – New Pension Scheme India

PFRDA India National Pension Scheme

This article is all about the Benefits & Pitfalls of NPS & its comparison with various other Financial Products offered by Government of India & Private sector such as EPF (Employees Provident Fund), PPF (Public Provident Fund) & Insurance Linked Pension Plans.

The scheme is set to replace the philosophy of pension assets in India from a defined benefit made to a superior defined contribution made.

Benefits of NPS -

- It intends to give an individual a choice of savings and investment products with different asset allocations.

- Professional Fund Management

- Centralised Administration

- An option to transfer the pension rights from one job/location to other.

- An option to transfer the fund from one fund manager to other

Limitations & Pitfalls of NPS -

- The offer document lacks the information and clarity about how an individual would accrue the income and be taxed under the scheme every year. And this is the main reason Financial Planners are afraid to recommend this Financial Product to the general population.

- The main limitation of the scheme is that, there is a cap of 50% on money you can allocate in equity

- Even though the fund management charges of NPS are low, we don’t have any past record of how they have performed.

- In the first tier scheme released, the premature withdrawal is not allowed.

- Withdrawal attracts tax implications under exempt-exempt-taxable (EET).

- The exact tax benefits and treatment at the time of withdrawal are not yet clear

- PPF or Bank recurring deposits right now appear far more superior to the NPS.

- The Scheme offers low liquidity

- The NPS comes with No Capital Guarantee

- Premature withdrawals are allowed only up to 20% of the pension wealth in the NPS

DOs & DONTs -

- According to Tax Gurus, you must take time to work out your cash flows, including future requirements carefully before you decide to invest in the scheme.

- It is advisable that you first read the small print before investing in it because the scheme offers low liquidity and No Capital Guarantee.

- One must be careful to commit substantial amount in the scheme as there is no assurance to the principal.

Comparison of NPS with other Financial Products -

- New Pension Scheme (NPS) – Exempt up to max. ceiling of 100,000 u/s 80 CCD r.w.s. 80 CCCE. Accumulation is exempt. Withdrawal is taxable. Minimum contribution is Rs.6000 per Annum. There is no ceiling in the maximum contribution. Below 60 years 20% can be withdrawn & 80% to be used for buying the insurance annuity. Above 60 years ratio is 40:60. No Assurance by government for security of capital fund and interest income. Fund Management charges are 0.0009%. Annual charges are approx. Rs. 400. Fixed Cost for account opening is Rs.50

- EPF (Employees Provident Scheme) – Employees contribution exempt up to max Rs.1,00,000 u/s. 80 C r.w.s. u/s 80CCE; Emplpyer’s contribution up to 12% of basic salary exempt. Accumulation is exempt from Tax. Withdrawal is also Exempt from tax. Minimum contribution of 12% compulsory for establishment with over 20 employees. Maximum Contribution of 27% of basic salary. Withdrawal is possible only after retirement or employment. Risk involved is NIL. Assured Principal and Interest. Fund Management Charges, Annual Charges &Fixed Cost are NIL.

- PPF (Public Provident Fund) – Same exemption as that of NPS and EPF. Accumulation & withdrawal are Tax Exempt. Minimum Contribution is Rs. 500 per Annum while Maximum Contribution is Rs. 70,000 per Annum. Risk involved is NIL. Security of Capital & interest Income is Assured. Fund management charges, Annual charges & Fixed account costs are NIL.

- Insurance Linked Pension Plan – Tax Exemption is same as other schemes. Accumulation is exempt. Withdrawal is commuted pension exempt (up to 1/3rd of total) Annual Pension –taxable. Minimum contribution is depending upon the terms of scheme. No upper limit for Maximum contribution. No surrender value before the expiry of 3 years. Risk depends upon the types of instruments. No assurance of capital by government. Fund management charges, Annual charges & fixed costs are variable.