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1. Additional Tax Benefit:
The Finance Bill 2011-12 permits tax deduction on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the national pension scheme (NPS) account of an employee under Section 80CCE. This is over and above the Rs 1 lakh limit and is applicable if the contribution is done by the employer. This is the reason why corporate houses are accepting NPS happily.
There has been a hike in inquiries about NPS mainly because of the tax benefit under Section 80CCE.
2. Higher Fee to Intermediaries:
The fund management fee for non-government funds has been raised from 0.0009 per cent of assets under management to 0.25 per cent. The fee for government funds has been changed to 0.0102 per cent from April this year
PoPs are allowed to charge Rs 100 plus 0.25 per cent of the investment, as against a negligible fee of Rs 20 previously.
The change is promoting New Pension Scheme by offering incentives to distributors and fund managers. The fund management fee of 0.25 per cent is nothing when compared to other products.
1. Tax on Maturity Proceeds:
There is confusion about taxation at withdrawal. According to the present laws the funds would be taxed at withdrawal.
Under the current laws, around 60 per cent corpus on maturity can be withdrawn while at least 40 per cent has to be used to buy annuity. Presently, returns from annuity insurance plans are not tax-free.
The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax at withdrawal. However, it is uncertain if the DTC would allow tax exemption on returns from annuity plans as well.
The tax at withdrawal stands in the way of making NPS the best pension scheme.
Another lag is limitation on withdrawal from Tier-I account, the primary account for pension savings. On maturity also, one can withdraw only around 60 per cent funds; the rest has to be used to buy annuity, the returns from which are not tax exempted.
Even the annuity also has to be bought from one of the six PFRDA-approved insurers. Options to choose from in case of the number of annuity providers are anyway less with LIC commanding a 70 per cent market share.
3.Low on Equity:
NPS portfolios are restricted to have more than 50 per cent exposure to equity. It spells loss for people in their 20s or early 30s, as equity has shown to offer 12-15 per cent returns per year over long periods.