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Saturday, 30 May 2009

NEW PENSION SYSTEM - NPS

Dear friends, a lot of u were demanding details on the NPS, so for  benefit of all of you. Here i'm giving some details of this.


WHO CAN INVEST?
Scheme is open to all Indian citizens aged between 18 years and 55 years.

WHERE TO INVEST??
You can invest from any of the 285 Point of Service across India, run by 22 Point of Presence Providers(POP) including SBI, its 7 Associate Banks, ICICI Bank, LIC, Reliance Capital, etc. Once registered, the Central Recordkeeping Agency (CRA) will give you a Permanent Retirement Account Number (PRAN) along with Telephone and Internet Passwords.

HOW DOES THE NPS WORK??
Just like a Depository maintains Demat Accounts, likewise your Records are maintained by the Depositories.
Six Different Pension Fund Managers would invest the Amount Invested by the Commonn People into Different Asset Classes classifed as
Equity (E)
Government Securities (G)
Debt Instruments (C)

The Six Fund Managers are
ICICI Prudential pension Management\
IDFC Pension Fund Management
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund,
SBI Pension Fund
UTI Retirement solutions

Depending on the efficiency of the Fund Manager, these Contributions would Grow and accumulate over the years.
You do need to mention the Fund Manager of your Choice, without this, your Application is liable to be rejected.
The Default Investment is called the Auto Choice Lifestyle Fund.
For a investor below 35 years of age, 50% of investment amount will go into E(Equity), one-fifth into asset class G(Govt Securities), and the rest into asset class C(Debt Instruments). From the age of 36, the default proportion going to equities decrease annually and investment percentage in government securities will increase such that by the age of 60, these investments will gradually be adjusted so that only 10% remains in equities, another 10% in corporate bonds and 80% in government bonds.

MINIMUM CONTRIBUTION :
Minimum Contribution per annum is 6000 and you can contribute even as low as 500, at least 4 times a year. You can invest through Cash, Cheque or DD at the POP.
There is no upper ceiling for your annual contribution but Tax Benefits is capped at 1 lakh under Sec80C. The Investor HAS to invest at least once every quarter. In case of default, you will have to pay Rs.100per annum and also need to pay the required minimum amount to reactivate your Account.
Also during this period of your non-payment, your Corpus will keep getting reduced because the NPS will keep charging its Expenses against your Units. The Account will be closed as and when the Value of your Account falls to Zero.


WHERE IS MY MONEY INVESTED???
You have got the Right to decide where your money is invested. Please note, that you cannot invest more than 50% in Equity and Fund Managers cannot in invidual stocks but only in Index Funds.



RETURNS :
On Completion of 60 years, the investor`s accumulated amount gets transformed into a lumpsum towards buying Annuity for a steady stream of payments for the rest of the Investor`s life. The Insurance Companies, who come into the picture now, with their expertise will compute as to how long the investor could survive and offer flexible investment and payment options on annuities.
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies.
A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

LAST YEAR THE NPS GAVE A RETURN OF 14.82% WHILE HANDLING THE CORPUS OF CIVIL SERVICE PENSIONS.


TAX ANGLE :
At present, the NPS is to be Taxed at the time of Withdrawal. The Pension Fund Regulator has taken up the issue with the Finance Ministry to address the anamoly and the decision is expected within next year or so.


NEGATIVES :
1) Though the Fund Management is ridiculously low at a miniscule 0.0009% per annum, the Cost of Opening an Account(Rs.50), Annual Maintenance Charge(Rs.350) and a Per Transaction Charge of Rs.10 actually makes the NPS COSTLIER than a Regular Mutual Fund with a 500 monthly sip. The cost works out to around Rs.350 as fixed cost on every Rs.2000 he contributes. Unless the Govt steps in to correct this, NPS would be a failure with the small savers.
2) No Tax Concession on Withdrawals.
3) No premature Withdrawals allowed expect for Critical Illness, building/buying a house; Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity.
4) You need to compulsorily buy Immediate Annuity with 80% of the Money accumulated, if you want to Withdraw before you are 60.

POSITIVES :
1) The Investor has the option of shifting from One fund Manager to another by instructing his POP to do so. This facility is available between May 1 and May 15 every year.
2) Even relocating to another city will not affect your investment as the PRAN remains the same.
3) The Monthly/Quarterly Contribution towards the NPS will be partly routed towards Equity which will automatically ensure Rupee cost Averaging and ensure High Returns and thus ensure 'higher than inflation' returns.
4) Investment upto Rs.1 lakh is Tax Deductible under Sec80c.
5) For Investors with slightly larger amounts and investing 4 times a year, the charges are attractively low. The NPS wins hands down on this matter.

CONCLUSION :
This is the Best thing to have happened to the Indian Investors who have not had much of a choice regarding Pension earlier. The benefits of Compounded Returns that the NPS offers will be immense. If the NPS is promoted in the right way, it will be no less than a Revolution.
The Tax on Withdrawal, for me, is a blunder and will be rectified by the Govt sooner rather than later.
The Interim Withdrawal too may be allowed in future, which will make this product that much more attractive.
The best option as of now i think is to remain invested in max. Eq. for person below age 50 & above that should go for the LifeCycle Fund.
The Low Charges and Automatic Rupee Cost Averaging makes NPS a Better Option than the Pension Plans offered by Insurance Companies.
But still some loose ends are there so as of now enter in NPS with minimum annual commitement of 6K Rs. & wait for the dust to settle & the clarity on taxation matters & then bump up ur investment in NPS.

Thanks

Ashal

Sunday, 3 May 2009

Tax calculation for STCG on STP from Liquid fund to Equity fund

Q. - Dear Friend,

i have been reading ur post quite long time. please advise on this.

I would like to know the Tax treatment on STP transaction. My transaction are ::

Invested Rs. 49,999 in DSPBR MoneyManager fund on 10th of Dec 2008. Registered STP in DSPBR top 100 equity fund.

started STP from 7th of Jan 2009 for Rs. 4000 every month. so till date total 4 instalments totalin 16000 has been transfered to top 100 equity fund. i understand tax treatment for equity fund. but not for liquid fund. The profit i made each month is

7th jan = Rs. 43
7th Feb = Rs. 57
7th Mar = Rs. 60
7th April = Rs. 65

I would like to know the tax treatment on liquid fund. if there is any tax how it will be taxed(like i need to add in my salary income or some % i have to pay).

If i dont show these incomes to IT Department(i think very few Retail investor use to show these incomes) what will happen.

Waiting for ur reply.

Thanks
Amit

Dear amit, ur STP transactions from Liquid fund to Eq. fund r ok.

The tax treatment is as below.

For Transactions b4 31st of march 2009, the same `ll be treated at STCG & `ll be added to ur income from all other sources & `ll be taxed as per ur tax slab rate in the prev. FU i.e. 2008-2009.

So for total STCG = 43+57+60 = 160 Rs.

As per ur Tax slab the Tax `ll be =

@ 10.3% slab = 17Rs.
@ 20.6% slab = 33 Rs.
@ 30.9% slab = 50 Rs.
@ 33.99% slab = 56 Rs.

Ur April onwards STP `ll be taxable in the same manner for ur income in the current FY i.e 2009-2010.

I hope the message is clear to u now.

thanks

Ashal...