Last week, the Pension Fund Regulatory Development Authority (PFRDA) appointed State Bank of India, UTI Mutual Fund and the Life Insurance Corporation as fund managers for the schemes to manage the corpus that has accumulated since the NPS was launched in January 1, 2004. At present, the NPS is restricted to all central government employees who have been recruited after January 1, 2004.
The money will be invested in the manner that has been laid out in the guidelines. At the initial stage, the money will be distributed among the fund managers for management according to the initial management fee and transaction charges.
The distribution will be reviewed each year after taking into account the fund manager's performance and the investment management fee. This new structure is expected to make this scheme effective, operational and inject professionalism in the management of funds. All this is crucial in ensuring that investors have faith in the system.
Also, a central recordkeeping agency (CRA) is being set up to manage the details of the scheme. The CRA is an entity that is similar to the depositories that take care of managing stock holdings.
The CRA will maintain the record of each member in the pension scheme, issue the members with a unique permanent retirement account number (PRAN) and provide an annual statement, among others.
The PRAN will be the single number that will be used when a person switches jobs across employers and even across different regions of the country. This will help the employees keep track of the pension accumulation over the years.
According to the details, every month the employee as well as the government will contribute 10 per cent of the employee's salary to the scheme. This money will then be given to fund managers for the purpose of management.
In the coming days, it is expected that this scheme will include more people as more entities like state governments join the scheme. Further, it could be extended to non government employees as well.
The good part about the scheme is that there will be scope for employees to earn higher returns because it has been mandated that up to 15 per cent of the corpus of the retirement money can be invested in equities. Out of this, 5 per cent can be in direct equity and the rest 10 per cent in equity linked mutual funds.
The employee has been given the choice in deciding the portfolio composition as he can mandate his fund managers to change the option if he wants from equity investment to fixed income investment. The fund managers will also offer an option to employees to invest the entire portfolio in government securities that will ensure some sort of assured returns but the returns can be expected to be lower than equity. The Bill is presently awaiting approval from the parliament. Once that happens, more investment options are expected to be available to investors.
As far as the tax element goes, there is a slight difference in the structure for this. Both the employee's contribution and the employer's contribution are tax deductible. Both these amounts along with other specified investments will fall under the overall Rs 1 lakh deduction limit available for eligible investments under the three sections (Section 80C + Section 80CCC + Section 80CCD) of the Income Tax Act.
However, when the amount is received after retirement as a pension then there is no tax benefit for the person. In other words, while you will get deduction for contributing to this scheme, there will be no benefit once you receive it as pension. This full pension amount will be subject to the tax applicable to you at that particular point of time.
The writer is a certified financial planner.
