National Pension System Schemes

We all rely on mutual funds or ULIPs for our retirement but there are a lot of hidden charges like mortality charges, entry load, fund management charges, recurring charges, policy administration charges, premium allocation charges.

On an average, if you opt for a retirement plan, you might end up paying following charges.

Premium Allocation Charge 5% to 6% p.a. (in some cases, up to 9%)
Fund Management Charge 1.35% P.a.
Policy Administration charge Vary according to policy

However, alternatively you can also invest in National Pension System. It has the lowest charges in the world.

Initial Subscription charge Rs. 100
Transaction charge (involving deposit) 0.25% of the transaction (subject to minimum of Rs. 20 and maximum of Rs. 25,00)
Any other charge (change in investment, withdrawal request etc.) Rs. 20

Funds

This system has only 3 funds: -

  • Asset Class E – investments in predominantly equity market instruments.
  • Asset Class C- investments in fixed income instruments other than Government securities.
  • Asset Class G – investments in Government securities.

You can manage your fund on your own or could opt for life cycle fund. In this option, your investment in Asset Class E reduces over time and your money is shifted to safer investments.

Maturity

  • The maturity age is fixed at 60 years. You can withdraw up to 60% on lump sum and you will have to purchase an annuity from the remaining 40% of the amount.
  • In case, you wish to withdraw before attaining age of 60 years, you will have to buy annuity from a minimum of 80% of the amount and withdraw the remaining 20% of the amount.
  • In the unfortunate case of your demise, the nominee will receive 100% of the Pension wealth in lump sum.
  • In other plans, you can withdraw up to 33.33% in Lump sum.

Annuity can be purchased from the following insurance companies: -

  1. Life Insurance Corporation of India
  2. SBI Life Insurance Co. Ltd.
  3. ICICI Prudential Life Insurance Co. Ltd.
  4. Bajaj Allianz Life Insurance Co. Ltd.
  5. Star Union Dai-ichi Life Insurance Co. Ltd.
  6. Reliance Life Insurance Co. Ltd.

Tax Benefits

The contribution from employees to NPS Tier-I up to 10 per cent of basic and dearness allowance is tax exempt under Sec 80 CCD with a ceiling of Rs. 1 lakh. From April 1, 2012, employer’s contribution up to 10 per cent of basic and DA to employee’s account is treated as business expenses and adjusted in the profit and loss account (thus, it is tax deductible).

Current laws state that the funds will be taxed on withdrawal and returns from annuity insurance plan after retirement will not be tax free.