National Pension System New Changes

NPS New Changes

The National Pension System (NPS) is arguably one of cheapest investment products in the world. On an investment of Rs.1 lakh, the fund management fee is just Rs.10 a year, compared to Rs. 1,500 - Rs. 2,500 charged by a mutual fund or a Ulip. It is also a very tax-friendly product. Besides enjoying tax deduction under Sec 80C, the NPS offers an exclusive window of Rs.50,000 under Section 80CCD (1) and additional deduction to corporate employees who invest in the scheme under Sec 80CCD (2). Besides, the there is no tax incidence if the investor switches from one asset class to another or changes his pension fund manager.

To make the scheme more attractive to subscribers, the Pension Fund Regulator and Development Authority (PFRDA) has made several changes in the rules governing the scheme. Here are those changes:

» INCREASED EQUITY EXPOSURE - A major drawback of NPS was that it caps the equity exposure at 50%. With introduction of the new life cycle fund option, NPS now allows up to 75% equity exposure. The Aggressive Life Cycle Fund (LC-75) will have 75% exposure to equities till the age of 35 and thereafter start reducing it by 4% every year. » EXPOSURE TO ALTERNATIVE INVESTMENTS - Introduction of a new asset class that allows up to 5% of the corpus to be invested in alternative investments such as mortgage-based or asset-backed securities, real estate investment trusts (REITs), units issued by infrastructure investment trusts and alternative investment funds (AIFs). » DEFERRING PURCHASE OF ANNUITY - NPS investors have to compulsorily buy an annuity with 40% of the corpus. Planners say this is restrictive because annuity rates are based on the interest rates prevailing at that time. PFRDA has now allowed investors to defer the purchase for up to three years. » 40% OF CORPUS MADE TAX FREE ON MATURITY - This year's Budget had made 40% of the NPS corpus tax-free on maturity. This changed the NPS from an EET product to a quasi EET instrument where 60% of the corpus is taxable while 40% escapes tax. It has also made NPS better than pension plans offered by insurance companies, where the tax free withdrawal is restricted to 33%. » EARLY WITHDRAWALS ALLOWED - NPS investors can now withdraw up to 25% of their own contribution for specific needs such as children's higher education or marriage, construction or purchase of first house, treatment of critical illness for self, spouse, children or parents. » LOWER MINIMUM INVESTMENT OF Rs.1,000 - PFRDA has lowered the minimum investment from Rs. 6,000 to Rs.1 ,000 a year. The lower limit will encourage people to experiment with NPS.

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