14 July, 2010

NPS has a tax edge,but watch out for annuities

NPS(NEW PENSION SCHEME)has a tax edge,but watch out for annuities.

The New Pension Scheme (NPS) is likely to get a makeover if the revised Direct Tax Code is implemented.However,the government is doing its bit to lure investors to take a close look at the NPS.Recently,the government announced the Swavalamban scheme through which it would add Rs 1,000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme in this financial year.Any NPS subscriber who invests Rs 1,000-12,000 per annum between April 1,2010 and March 31,2011,will get Rs 3,000 free from the government.


The revised DTC,if implemented without any changes,will keep the NPS out of the tax net.This new change will make the NPS an attractive investment opportunity.The government has proposed EEE (exempt-exempt-exempt ) method of taxation for NPS,which implies the NPS will be exempt from taxes at all the three stages of deposit,appreciation and withdrawal.Earlier,the NPS proceeds were taxable at maturity.


One of the major advantages is also the lowest fund management charge,which is Rs 99 per lakh (0.0009%) compared to charges of a pension plan offered by an insurance company,which is around 0.75-1.75% per year.This low-cost structure makes it more attractive than most annuity/pension plans offered by insurance companies,financial advisors say.The custodian charges are in the range of 0.0075% to 0.05%.Despite all charges,the cost of investment is cheaper than charges of mutual find and ULIPs.


Investors have an option to choose their investment mix among three categories.The first one (E) refers to high investment exposure in equity,which targets investors with a high risk appetite.Equity investment,however,is capped at 50%,which mainly comprises index funds.The second option (C) is high exposure in fixed income instruments,which targets investors of a moderate risk profile.These instruments include liquid funds,corporate debt instruments,fixed deposits and infrastructure bonds.The last option is pure fixed investment products (G) which offer low returns.Ideally,you should start investing for your retirement in your early thirties.If you have the advantage of longer investment horizon (20 years plus),equity is the best option to start with.But in the case of the NPS,you have to buy a life annuity offered by life insurance companies.The NPS requires the investor to use the retirement corpus to buy annuities to avoid taxation.As per the existing stipulations,you have to invest 40% of the corpus in annuities.


Annuity plans which dont return the purchase price offer 8-9 % and the ones that return the purchase price offer 50% a year are other options.Any bank deposits over five years,which offered 10% a couple years ago,offer around 8-8.5% today because of a decline in interest rates.There are other assured monthly income options like the Senior Citizens Savings Scheme (SCSS) which offer 9%,PPF at 15% and the post office monthly income scheme at 8%.


If you are planning to invest in the NPS,invest now to make the most of the compounding effect of Rs 3,000 (the government contribution)


You have to buy annuities at maturity,which offer a return of 5-6.5%.

Source: Economic Times

10 July, 2010

DTC may trigger another regulatory battle.

PFRDA'S Proposed Role may put it on confrontation path with other Regulators.
The Government may have put a lid on the battle over regulating unit-linked insurance policies (ULIPS) between the Insurance Regulatory Development Authority (IRDA) and the Securities Exchange Board of India (SEBI) with its arguable choice of an ordinance. Ironically, three days before president Pratibha Patil signed on the dotted line to keep SEBI out of the murky world of ULIPS, the finance ministry had sown the seeds for a more elaborate regulatory turf war in the days to come. And when this war starts, it would not just upset the insurance industry’s applecart, but also create a headache for retail investors, mutual funds and India Inc.
In the much-diluted revised discussion paper on direct taxes code released on June 15, finance minister Pranab Mukherjee dropped the plan to tax long-term savings at the time of withdrawal. Since India does not offer any universal social security to its citizens, taxing their sunset years’ savings may be too harsh, he admitted. As per the new proposal, existing investments in products that enjoy a tax-free existence at all three stages — contribution, earnings on investment and withdrawal — would remain tax-free. ‘Permitted savings intermediaries,’ the code says, will be allowed to invest in government securities, bank deposits, ULIPS, corporate bonds, equitylinked and debt mutual funds and stocks. This is quite broad-based.
The tricky part is that the onus of approving a ‘permitted savings intermediary’ would lie with the Pension Fund Regulatory and Development Authority (PFRDA) and that opens up a minefield for regulators to fight over.
Even before the tax code, the PFRDA could have waded into the SEBI-IRDA battle. Just as SEBI believed that ULIPS were nothing but expensive mutual funds, PFRDA should have been concerned about the rising sales of pension-laced ULIPS.
After all, the PFRDA was set up to regulate pension products after the Centre overruled the IRDA’s contention that insurance and pension are similar products. But the PFRDA remained an observer rather than aiding SEBI'S ULIP assault, as it was headless at the time and is yet to get legislative backing.But these reservations won’t hold as and when the tax code becomes law. Having launched the NPS (New Pension Scheme )for all citizens in 2009, the PFRDA would find itself sitting in judgement on pension ULIPS as well as a handful of pension products from the mutual fund industry. It would have to be really magnanimous to allow fresh investments in competing products to continue unfettered even as its own scheme gets little push from commission-driven intermediaries.
Even if PFRDA refrains from rocking the boat too much, the very nature of its role under the tax code would cause friction. For instance, even if it approves pension ULIPS from insurers, PFRDA would find it tough to enforce standardised reporting formats as no two insurers arrive at net asset values (NAV) or returns on the same basis. If PFRDA gets tough with insurers, the IRDA could point out that the NPS (NEW PENSION SCHEME ) also does not announce NAVs yet.
Bickering apart, few realise that India Inc also has thousands of crores at stake in such turf battles. Apart from the mandatory provident fund benefits for workers, India Inc’s top employers spend another 20% of their salary bill to fund superannuation and gratuity benefits for their employees. Firms that manage these funds in-house have to follow a rigid pattern dictated by the finance ministry with a 15% cap on equity investments. So, many firms have been forced to turn to insurers — a group ULIP pension plan can invest upto 60% in equities.
For managing gratuity funds, insurers are the only outsourcing option for companies under Rule 101of the Income Tax Act. Insurers traditionally offered a group scheme for workers that worked like any other PF trust, which credits an annual dividend to members on the basis of earnings.
In recent years, group pension ULIPS have been a hit with many firms as they offer separate unitised pension accounts for workers with flexibility in asset allocation. To make these products relevant to IRDA, insurers throw in minimal life cover — a corporate that recently invested Rs 200 crore in a group ULIP got a collective life cover of just Rs 20 lakh for its staff.
When the SEBI-IRDA tussle broke out, several top MNCs broke a sweat on whether their Ulip investments would retain sanctity. Now, they are worried about whether the PFRDA would continue to allow such investments under the Direct Taxes Code. There is good reason for it.
The NPS (NEW PENSION SCHEME ) allows only 50% exposure in equities — and that, because the finance ministry shot down a decision by the PFRDA board to allow an option for 100% equity exposure. The tax code talks of prescribing an investment pattern for schemes where trustees take asset allocation decisions for workers. So would PFRDA allow the 60% cap in pension ULIPS to continue, if it is trying to woo the same corporate moolah into NPS (NEW PENSION SCHEME )? Firms such as Nalco and NTPC have already moved their superannuation pension monies into the NPS (NEW PENSION SCHEME ), thanks to its low-cost model. But companies with long relationships with insurers like LIC may not be inclined to follow suit, unless they are ‘nudged.’ There have already been some caustic brushes between regulators, though the ULIP tug of war may have been the ugliest. The finance ministry may have set up a separate panel to iron out regulators’ differences, but that can’t be expected to resolve operational ‘every-day’ aspects of the duties assigned to them by the same mandarins.

Source: Economic Times