New Pension Scheme-Decoded

We save for ourselves, for buying a house, for our children’s education and marriage, but how many of us save for our retirement? Given the fact that most of us are working in private sector, we don’t have any retirement security. So what when we finally stop earning. Yes our children are supposed to take care of us but then shouldn’t we be self sufficient?

The New Pension Scheme introduced by The Government of India is a step in this regard. All Indian citizens aged between 18 to 55 years are eligible. The minimum contribution is Rs 6,000 while there is no maximum limit. Also the amount is eligible for tax deduction under Sec 80C (up to a maximum of 1 lakh). However the truth is so far only 2500 people have enrolled for this scheme. My dad asked if he should apply also, so I did some studying and here is what I found out.

While the amount invested under Sec 80 C is eligible for tax deduction, it is taxed on withdrawal. Unlike PPF and PF, which are tax free even on withdrawal. This significantly reduced the returns of the scheme. Another reason why this scheme is not gaining popularity is the low fund management charges. The fund management charge is 0.0009%. That means for 1 lakh Rs invested you pay only Rs 9 as fund management charge (The same invested in a MF can cost upto Rs 2250). You will say that this is a good thing, isn’t it? Yes it is, however such a low fund management charge gives little incentive to fund managers to perform well. Hence the returns from this scheme are also likely to be low. So this blessing is actually a curse in disguise.

Well, there a lot of talks going around regarding a new tax system being introduced, etc etc, but then as of now this scheme has definitely more drawbacks than pluses and I would definitely not recommend it.

1 comment

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