Thursday, May 28, 2009

New Pension System

The major disadvantage of not being able to withdraw the money from the scheme lies in the taxation of the pension.

Pension, in whatever form it is recieved, is taxable under section 17 of the Income Tax Act. NPS deals a double whammy in this.

One, at the time of withdrawing even the partial amount that is allowed, tax will be levied on the withdrawls made. The pension one gets out the corpus continues to attract taxation as mentioned earlier. Therefore there is no respite at all from the tax.

Compare this with any insurance plan or PF or PPF etc. Here the investor gets the full money he has invested together with the returns FREE of tax. Which means, at the time of retirement, he has the option of deciding the mode of investment depending upon his/her convenience. Plus retain a lot of cash to meet expenses like marriage/education of children.

Forget about the fund management charges, even other fixed charges are not very attractive.

For instance, if a person were to make a deposit of Rs.1000/- every month into his pension scheme, the average cost works out to be 6%. So you end up paying a higher cost for a benefit which is non existent!

Cost should not be the only criteria to be looked into while deciding the investment option. Lower cost does not necessarily mean higher return. Because there is nothing called free lunch in this world.

Look at the fund management charges for NPS. 0.0009 percent of the fund value managed. This means, a fund manager should manage really large volumes of money to earn a reasonable fund management fees. Else, the fund manager will most certainly be in loss and any loss making entity will not deliver good performance. This is the universal truth. Already a few of the fund managers are grumbling about the low returns on the funds managed. Where is the incentive for them to perform??

Consider this, if an AMC manages funds worth Rs.100000 crores in the corpus, they will get Rs.90 crores in revenue. But look at the disadvantage of managing a fund of this size. The fund will not be agile enough to take advantage of the market movements.

Also, the biggest drawback of this scheme is that the capital is never given back in full. Whether one likes it or not, he has to continue getting the pension from a designated agency. What if there are better alternatives tomorrow? Or worse still, what if the investor needs the bulk money for any emergency? In the traditional pension plans offered by the insurers, there is an option to withdraw the corpus in cash. This option is missing in the NPS.

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