Friday, May 1, 2009


After a delay of one month, the New Pension Scheme has been launched for all today i.e. 1st of May 2009. This is a very significant step in the direction of providing the vast majority of working people an option of saving for pension post retirement. Till now, in India this option was available only for the government employees who had joined the services since 2004.But,now this is being opened up for all and sundry.As per a report form Wall street journal.Of the 450 million Indians of working age, only 10% currently have an organized pension plan – those who work for the government or for large salary-paying companies.New Pension Plan will allow people to save in fund managed by professional fund managers . The best part of this fund is its ridiculously low fees. The fee differential alone makes it a far superior product than any other saving scheme available to Indians as on date.

As of now, the fund can invest a maximum of 50% of the fund in equities and rest has to be in debt,govt securities etc.The investor is free to choose the right mix of equity (E), corporate bonds (C) and government securities (G) in his/her portfolio. Alternatively, investor can choose auto option, wherein his investment in NPS will divided in pre-determined proportion of 15% (E), 45% (C) and 40% (G). In the case of automatic allocation, the entire investment will be equally distributed among all six fund managers in the first year. From second year onwards,the allocation will be pro-rated on the basis of the first year’s performance. This is primarily to ensure that the fund is not unduly exposed to the vagaries of stock market. However, since its a long term product which aims to accumulate wealth over a long period, many argue that the limit of 50% may be revised upwards. In US , the equity exposure for pension funds range between 50-70%. Hence, The Pension Fund Regulatory Development Authority (PFRDA) has said that this limit of 50% equity exposure will be reviewed after a year.

The contributions to this fund will be exempt form tax and so will be the returns on it. But, the amount withdrawn from this fund on maturity will be taxed, as per the current norms. This is a big disadvantage for the fund as proceeds form most of the other long term schemes like NSC, PPF,PF etc are not taxed . The pension fund regulator has also recommended to the government that the scheme be exempt from tax when money is withdrawn.
As of now the minimum savings required under this plan is RS 6000 per year. Though Rs 6000 a year is a very small amount, it still is out of reach from a large portion of Indian population.According to Wall Street journal, 140 million people in India earns just RS 3000 per month and for them saving RS 6000 a year may not be possible. As such government is also working at a proposal to launch micro pensions. Micro Pensions are Pensions that apply the approach of micro finance to retirement benefits. The idea has been around for a few years but is starting to take off. This week, Invest India Micro Pension Services, a Delhi-based micro-pensions service provider, teamed up with Hyderabad-based Basix, one of the biggest micro-finance banks, to offer pensions this year to about 700,000 of Basix's 1.6 million poor, rural borrowers.Government is also mulling on a proposal to match the contributions from poor people in this fund. For example ,Rajasthan is offering 1,000 rupees for every 1,000 rupees saved under the program.Many more states are expected to do the same for their own people.
This is a significant product aimed at providing sustainable income for retired people in the form of pensions. The government needs to create huge awareness about this program so that this is a major success. I hope it brings about the change it is expected to.
Also check out this article in economic times for more on NPS.


  1. I really liked the idea of NPS, but how can we trust that the hard earned money earned by us is being utilised properly.

  2. Well Anonymous, appreciate your comment. AS far as your concern on the money being utilised properly is concenrned , let me say this that the NPS money is being managed by 6 fund houses , each of which are appointed by PFRDA. Also the investor has the option to choose the fund house he wants his money to be managed by. Not only that, the investor can switch between the fund houses . This will esnure that there is healthy competition betwen the fund houses to deliver superior returns and garner maximum funds for management under NPS.

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