Lower transaction cost, but no tax relief

The new pension scheme (NPS) is unlikely to see a sharp improvement in investment in the coming months though transaction cost for fund managers is expected to come down.

Finance Minister Pranab Mukherjee turned the plea for exempting the maturity amount from the ambit of income tax at the time of withdrawal and said that the exempt-exempt-tax regime would continue. Fund managers and tax planners had cited the absence of tax exemptions, available for competing funds such as public provident fund (PPF) and employees provident fund (EPF), as a deterrent for investors.

“It (the tax treatment) is not in sync with other fund option like EPF and PPF and consequently, NPS will not see a major boost post budget,” said UTI Retirement Fund Chief Executive Officer Balram Bhagat.

Mukherjee, however, addressed the other concerns expressed by fund managers who are expected to render service at 0.09 basis points by exempting the NPS Trust from payment of Securities Transaction Tax (STT) on all purchase and sale of equity shares and derivatives.

In addition it has let off income of the NPS Trust from income tax and dividend paid to the Trust from Dividend Distribution Tax (DDT).

“The expenses towards fund management will reduce since we paid 0.25 per cent of the invested amount towards STT. Accordingly, net asset value and returns will go up,” said LIC Pension Fund CEO H Sadak.

As per the new pension fund scheme, the investment in equities is allowed in index funds, either 30-share BSE Sensex or the 50-share Nifty. The pension subscriber has the option to decide on the proportion of fund investment in the asset classes.

The fund managers expect the corpus of investment to rise with the removal of STT and DDT, which will result into better result.

"The proposal to exempt income of the NPS Trust from income tax and any dividend paid to this Trust from Dividend Distribution Tax can give an impetus to the NPS. This also provides Indian investors a much-needed tax benefit to plan for their retirement and patronise NPS," said Bharti Axa Life Insurance CEO Nitin Chopra.