Reference to NPS in article on retirement planning published in Express Money section of Indian Express on 31.08.2009
The Indian Express has published an article on Retirement Planning in their Express Money section written by Shri Sanjay Kr Singh. The article has drawn certain references to the New Pension System which do not give the full picture and, therefore, it has been considered necessary to issue some clarifications as follows:
1. Regarding tax status of NPS
As per the Finance Act 2009 the amount accumulated in the NPS account utilized to purchase an annuity is exempt from income tax. The article does not provide the full picture that NPS corpus will not be taxed if an individual buys an annuity.
2. Regarding waiting till 2010-11 to see what the new tax code holds for NPS
It has been stated that investors should wait till 2010-11 to see what the new tax code holds for NPS. This statement is misleading as under the Finance Act 2009, NPS accumulation utilized to purchase annuity is exempt from income tax.
3. Regarding availability of historical data for decision making
It has been stated that it is difficult to decide which fund manager one should invest with, as no historical data is available. Although NPS for common citizen was rolled out on 1st May, 2009, the NPS for Central Government employees has already been operational.
The weighted average return on the pension funds for the first year of operation as on 31st May, 2009, was 14.82% according to the unaudited figures submitted by three Fund Managers viz., LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions. Moreover, historical data regarding the performance of the sponsor companies is available which is a reasonably good indicator.
Extract from the article published in The Indian Express(Express Money Section) on 31.08.2008
Title: “SAVE NOW SO YOU CAN PLAY GOLF AFTER 60”
Author: Shri Sanjay Kr Singh
Should you use the NPS?
First, let us dwell on its positives. If you invest the equity component of your retirement savings in the New Pension Scheme (NPS), it would get managed at a low cost. Its cost is lower even than that of an index fund. For young investors, especially, the low cost would make a substantial difference to the final corpus. Its second advantage is that since it offers limited liquidity, the money remains available till retirement and doesn’t get used up for other purposes.
However, at present there are a couple of issues with the NPS. The most important is its tax status, which is EET. The NPS corpus gets taxed at withdrawal (while PPF and equity funds are not). Says Dhawan: “With the new tax code coming in, all instruments will be treated in a similar manner. Sooner rather than later, NPS will receive equal treatment. The reason why the NPS has been given EET status and not EEE status is probably that the government wants most products to move to EET status. Investors should wait till 2010-11 to see what the new tax code holds for NPS.”
Another issue with the NPS is that at present it is difficult to decide which manager you should invest with as no historical data is available. On the equity side, the NPS at present works like an index product with no active management. If, for reasons mentioned earlier, you believe that actively managed funds should be a part of your portfolio, then this is not the product for you.
Source article: indianexpress