NPS (New Pension Scheme) launched by govt. of India in May last year which didn’t kicked of as expected is set to get lot of attraction after release of new draft of Direct Tax Code 2011. According to the revised draft of the Direct Tax Code that was released by the finance ministry the government proposes to extend the EEE method of taxation to Government Provident Fund (GPF), Public Provident Fund (PPF), and the New Pension Scheme (NPS). Al annuity schemes of Life insurance companies are brought under the EEE method of tax treatment. NPS will now enjoy level playing field with other retirement schemes available in the country like PPF, GPF and EPF. This will encourage long term savings by citizens of India who would like to spend their later half of life with regular income or lump sum corpus.
EEE method of taxation essentially means contributions made to any of these financial products will be exempt from tax at the investment stage, during vesting period and at the time of withdrawal as well. Due to favourable tax treatment, PPF, till date, is considered as one of the best long-terminvestment vehicles.
Earlier there were no takers for NPS as it proposed to tax the benefits on retirement and people still considered PPF, EPF as most preferred investment giving 8% and 8.5% fixed returns respectively at present. NPS last year gave around 14.82% average returns outperforming any other long term investment provided by Govt. of India. With the announcement of Swavlamban scheme in which Govt. will contribute Rs 1000/- per annum every year for all accounts opened in current financial year, as well as Govt. of Haryana as well as Karnataka also announced that they would contribute additional Rs 1000/- per year for all residents of their state, NPS is set to become most preferred long term investment. Considering that total charges being charged in NPS is not more than 0.05% as compared to around 1.75% being charged in mutual funds, and around 1-1.5% FMC + several other charges being charged by ULIP offered by Life insurance companies, the net yield would be much higher in NPS if the fund performance are same.
Please refer illustration NPS can fetch upto 80% higher net yield which shows comparison between ULIP and NPS.
The revised code also mentions that an employer's contribution to an approved provident fund, superannuation fund and New Pension Scheme within the limits prescribed shall not be considered as salary in the hands of the employee. Also, retirement benefits received by an employee will be exempt subject to specified monetary limits. Thus, the amount of gratuity received, the amount received under a voluntary retirement scheme, the amount received on commutation of pension linked to gratuity received and the amount received on account of encashment of leave at the time of superannuation are proposed to be exempt, subject to specified limits, for all employees.
