Prop for new pension plan

Subscribers to the New Pension Scheme (NPS) won’t have to pay any tax on maturity provided the sum is used to purchase an annuity plan in the year of exit. To make this possible, the finance bill of this year’s Union budget has proposed to amend section 80CCD of the income tax act and insert a new sub-section (5) . Under the proposed amendment, the assessee (who is a subscriber to the NPS) shall be deemed not to have received any amount (from the NPS) in the previous year if the amount is used to purchase an annuity plan. The New Pension Scheme allows for the receipt of 60 per cent of the corpus on maturity, while the contributor will have to buy an annuity plan with the remaining 40 per cent and get a monthly pension. If contributors invest the 60 per cent in an annuity plan of a life insurance company they won’t have to pay any tax under the proposed sub-section (5). The monthly pension income from the annuity plan will, however, be considered as income and suitably taxed. Contributions to the NPS and fund accumulation therein are already tax free. The New Pension Scheme, which was rolled out for all other individuals besides government employees from May 1 this year, didn’t find much favour with investors. Only 650 people joined the scheme since its launch, accounting for a total fund size of Rs 80 lakh. Though the NPS is a relatively cheap retirement product — only the Employees Provident Fund and the Public Provident Fund are better in terms of cost as they don’t have any charges — it failed to attract investors because the withdrawals on maturity were taxable. Even pension plans offered by life insurance companies allow for the receipt of one-third as lump sum on maturity without any tax liability. Thus, despite having the highest cost compared with all other products, premium income from pension plans accounts for 20 per cent of a life insurers’ total business. “The new provision on tax treatment will make the NPS more attractive to investors,” said Anil Chopra, group CEO, Bajaj Capital. “However, people should consider investment in the NPS in conjunction with the PPF or the EPF where withdrawals are tax-exempt,” he said. Chopra said that the exemption of the NPS Trust from paying the securities transaction tax and any tax on income would increase the return on investment for beneficiaries. Source: The Telegraph,Kolkata.Friday,10/07/2009