Friday, October 22, 2010


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

NPS the cheaper and Tax Friendly Alternative:

NPSInsurance Plans (ULIP Based)Mutual Fund Pension Plan
Investment amount per year100000100000100000
Charges per Year (Initial Period)925132001250
Charges per year (5 Years to 10 years)38860001250
Charges per year (11 years to 15 years)45530001250
charges per year (16 years) 45501250
Fund Management0.0009 %1.25 %1.25 %
Age limit for annuity60Flexible58
Assume CAGR10 %10%10%
Maturity proceeds after 30 years1.8 Crores1.3 Crores1.39 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.


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