NPS makes Sense | Value Research The NPS is a good scheme for anyone considering a self-invested retirement plan. Find out more…
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NPS makes Sense

The NPS is a good scheme for anyone considering a self-invested retirement plan. Find out more…

I am 35 and want to know about the NPS scheme launched by the government. Is it a good scheme? Also, what is the best pension plan that I can start contributing to?
- Navin Soni

The defined-contribution-based National Pension System (NPS) was launched by the Government of India and came into being on January 1, 2004 and has all central government employees under its ambit barring the armed forces. The scheme was opened for all citizens from May 1, 2009.

The scheme has a two-tiered structure: Tier I is mandatory and non-withdrawable pension account, with monthly contribution equalling 10 per cent of basic salary by the account holder with an equal amount deposited by the government. Tier II is a voluntary withdrawable account from which an individual can withdraw money anytime without giving any reason and has no contribution by the government.

The scheme is good for anyone considering a self-invested retirement plan, especially for those without any employer-promoted retirement plan. However, there are a few aspects to NPS that one should be aware of like there are no guaranteed returns on contributions. At the time of opening an NPS account one will need to pay Rs 50, which is a one-time account opening fee; Rs 40 towards initial subscriber registration and contribution upload; Rs 350 for annual maintenance of the account; a custodian charge of 0.0075 to 0.5 per cent of the fund value; and an annual fund management charge of 0.0009 per cent, which makes it the least cost managed investment. There is also a need to contribute a minimum Rs 6,000 per annum in the account, with a minimum frequency of four investments in a year. The investment options vary depending on one's risk tolerance with the most risky fund option having 50 per cent exposure to Sensex or Nifty stocks or through an index fund. The moderate risk fund has exposure to corporate debt and fixed income securities with little exposure in equity and govt securities. The safe fund option has investments in government securities, and very little invested in equities. And, there is the default option which follows allocation based on the account holder's age, with high equity allocation when one is young and gradual reduction with age.

On parameters of costs, the NPS is the least cost fund option, but that should not be the only criteria for investment because there is a limited history of fund performance when it comes to the NPS, which is what is needed to build wealth over time. Likewise, one needs to know of the tax benefits and limitations when investing in the NPS. Contributing to the NPS Tier I qualifies for tax deductions, with the NPS likely to be preferred long-term tax saving investment when the DTC comes into effect because under the proposed DTC only contribution to EPF, PPF and NPS will qualify for deduction of Rs 1 lakh, which means the NPS will acquire more importance and prominence once the DTC comes into effect. However, the tax treatment on retirement varies. On turning 60, you have to compulsorily purchase an annuity for an amount equal to a minimum of 40 per cent of the accumulated balance in your NPS account. The annuity needs to be bought from a life insurance company, which is registered with Insurance Regulation and Development Authority (Irda). The money that is left after purchase of mandatory annuity, up to the extent of 40 per cent of the accumulated wealth, is exempt from tax and you are free to use it the way you want to. But, the annuity income will be treated as income and taxed appropriately at the time of retirement. At your age, the risk of investing in NPS is the tax treatment on maturity, which can significantly impact your income in retirement.

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