How NPS repays?

The Government of India has introduced New Pension System (NPS) in January 2004 which is mandatory for employees joining services w.e.f. January 2004.

NPS has been extended to all citizens as a voluntary st pension w.e.f. 1 May 2009.

However two different types of mechanisms have been introduced by PFRDA as far as pay out from New Pension Scheme

Pay out in NPS for Central Govt Employees :

At the time of retirement or at the age of 60 and when accumulation period ends an employee has the option to invest at least 40% accumulated wealth in purchasing an annuity plan from a life insurance company approved by IRDA and to take maximum 60% of as lump sum withdrawal.

Pay out in NPS for all citizens :

Voluntary NPS allows an investor, withdraw before age 60 at any point of time but has to invest at least 80% of accumulated wealth to purchase an annuity from a life insurance company approved by IRDA and 20% as lump sum withdrawal.

However, under voluntary NPS , when an investor exit at the age 60 from the system has to invest at least 40% of wealth in annuity and the remaining amount can be withdrawn as lump or as a phased withdrawal between the age 60 and 70 This Phased withdrawal is an additional facilities in voluntary NPS.

Benefits of Dividend Option over Growth in Mutual Funds

Mutual fund investments have usually two options: dividend and growth. The amount invested by you in mutual funds are used to buy stocks, bonds or other investments. Over the period of time, the value of investments and cash surplus held in a mutual fund scheme is reflected in its NAV (Net Asset Value).

The mutual fund scheme in which you have invested makes profits on selling some of these investments that has appreciated based on stock price movements. Over time, these provide cash inflow for the mutual fund that it can either choose to re-invest by making fresh investments (growth option) or payout as dividend to unit holders (dividend option).

Say, a new Equity mutual fund scheme was launched a year back and collected money from investors at Rs. 10 NAV under two options — dividend and growth. Today, the NAV of both the growth option and dividend option is Rs. 18. The fund manager decides to book profits in investments and share the same with its unit holders who have opted for dividend. So he announces 50 per cent dividend. i.e. Rs 5/- per unit.

If this mutual fund advertises this dividend announcement by quoting a future record date for attracting more investments, is it prudent to invest for getting the dividend at the time of investment itself?

Unfortunately, the answer for this question  is No. The next day after the dividend record date, the NAV of this investment would drop to Rs. 13/-.

This is because a dividend from a mutual fund is nothing but a return of capital held by the fund scheme. The Rs. 18 NAV of the scheme with the dividend option, already included the distributable cash of Rs. 5/-, on distribution of which, as logic would suggest, the NAV reduced by an equal amount. Nothing is free in this world!

The NAV of the scheme with the growth option would remain at Rs. 18/- because the scheme didn’t distribute a dividend. An investor is no better off choosing the dividend option instead of the growth option. And, his purchase decision, triggered purely by the lure of quick returns through the dividend, is a misinformed one.

Every time a fund scheme announces a dividend, the same scenario will repeat, i.e. the NAV of the scheme will drop by an amount equal to the dividend amount. Within the same scheme, the NAV of the growth option will always be higher than that of the dividend option because the money is going back into the scheme and not given to investors. The reason for the difference in NAV between these two identically managed plans is that one keeps stripping money and dispatching it to investors while the other just re-invests any gains (income). It is this re-investment that has accumulated and appreciated over time, resulting in a much higher NAV today — a substantial capital gain.

So, Investors who only need long-term capital gain (wealth appreciation preferred over income) can choose the growth option. Such investors can still pay themselves a dividend when they want liquidity or when they feel the market is overvalued, by simply selling the requisite number of units!

On the other hand, investors who need income can choose the dividend option.  The dividend amount should not be the sole deciding factor while investing, because technically a fund can declare high dividends by merely selling its assets, irrespective of whether it has made a profit or loss! So dividends need to be evaluated in conjunction with the total returns that the fund has been able to generate.

However, investment in the mutual funds with dividend option would be beneficial in two aspects.  One is the tax treatment.

The following table illustrates the tax implications of dividends compared to capital gains. If you are going to hold your mutual fund units for over a year from the date of investing, capital gains have equal if not lesser tax outgo compared to dividends.

On the other hand if your holding period is less than a year, then you have to pay more short term capital gains tax as the amount equivalent to the dividend that was distributed in respect of mutual fund with dividend option,would be part of Net asset value in the case of growth option which is also taxable

The other is the benefit of tax exemption under Section 80C of IT act for the full amount invested in ELSS mutual fund with dividend option (Equity linked Savings Scheme) and yet getting back a portion of amount as dividend which would reduce your investment that is locked for 3 years (note : ELSS funds have three year compulsory locking period)

What is Human Life Value ?

Yes. It’s a price tag on human life. Every humanbeing is priceless to his family. But it becomes necessary to evaluate a human life in terms of money, in order to safeguard from under-insurance problems. Under-insurance at times leaves no trace of insurance when it fails to serve the purpose for what it was effected. Insurance on Human Life should be sought keeping in mind, the financial loss that the family would suffer in his/her absense. Instead of buying Life insurance policies as a tool for reducing tax liability, provision for old age, to venture into stock markets on a small scale etc, it would make sense if insurance is sought from the angle of economic replacement of human life value.
Human Life Value concept was founded by Dr. Solomon S. Huebner, the founder of ‘The American College of Life Underwriters’, in the 1920′s. HLV concept is used by various professionals like Underwriters, Courts, etc. for determining the economic value for a Human Life. For the victims of the ‘Terrorist attack of September 11, 2001′ on the twin towers, courts decided the amount of settlement based on this concept.
HUMAN LIFE VALUE of a earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member. This would be the maximum amount for which a person can seek insurance protection.
Human Life Value based on Income:

The first step towards computation of Human life value would be to determine the net annual income of the person after deducting the amount spent by him for his personal use. This amount will be the amount that he affords to his family annually. Let us assume that the person is 40 years of age and his annual income after deducting all his personal expenses sums up to Rs.3,60,000. So, in order to get this amount annually in the absence of this earning member, his family would need Rs.45,00,000 on his demise (This assumption is based on investment of Rs.45,00,00 as fixed deposit @ rate of 8% interest per annum).
However, the erosion money value due to inflation was not taken into account in this method.
Human Life Value based on expenditure:
The more complex calculation of HLV is based on expenditure that the family has to meet out after the earning member’s life. The factors such as age of life expectency of spouse, number of children and their dependancy period on the family, monthly household expenditure, cost of inflation, outstanding loans etc., are to be taken into account in the calculation of this type of HLV.
Of course, the disposable assets if any the family posesses, value of the same could be deducted from the total amount that family needs. Say, if the earning member left behind an asset valued at Rs.20 lakhs the same could be deducted from Rs.45 lakhs of capital requirement of the family worked out. So, as per our illustration, the family would require Rs.25 lakhs in addtion to the disposable asseet valued at Rs.20 lakhs, to earn an amount of Rs.30,000/- per month.
Type of Insurance :
Now, the type of life Insurance product that you want to choose in order to get the coverage of Rs.25,00,000/-, is an important decision.
The following will be the premium amount that you have to pay annually under different Life Insurance products. Well known insurance products in the indian market are Term Insurance, Pure Endowment Plans, and ULIP (Unit Linked Insurance Plans).

Which plan would you choose to get your life covered for Rs.25 lakhs ? Term insurance products seem to be cheapter than ULIP, Endowment etc. Is it so? Check this previous GConnect article that compares Term Insurance and ULIP.
The bottom line is one should get his life covered for sum that would serve the purpose of fulfilling all the financial needs of the family in his absence. Taking an insurance cover for a small amount that would not serve the purpose is as bad as not taking any life cover.

SMS and Email Alert facility for NPS

CRA has launched a new service called as SMS and Email Alert facility for the Subscribers under the New Pension System (NPS). As a part of this new facility, the Subscriber will be able to receive SMS and Email Alerts on the occurance of any one of the following events:

• Generation of PRAN for Subscriber
• Contribution Credit in the Subscribers PRAN

Terms and Conditions for SMS and E-Mail facility

1.1 Definition

In these Terms and Conditions, the following terms shall have the following meanings: "Alert/Facility" means the (services of providing the) customized messages with respect to specific events/transactions relating to a subscriber's Account sent as Short Messaging Service ("SMS") over mobile phone or email to the email account of the subscriber; "Subscriber" means the person who holds a Permanent Retirement Account Number (PRAN) opened by CRA and who is also IRA compliant; "CSP" means the cellular service provider through whom the Investor receives the mobile services. "CRA" means the NSDL who have been appointed as Central Recordkeeping Agency by PFRDA.

1.2 Availability

1.2.1 CRA at its sole discretion may discontinue the Facility at any time by providing a prior intimation through its website or any other medium of communication. CRA may at its discretion extend the Facility to investors who register mobile numbers originating outside India.

1.2.2 The Facility would be generated by CRA and will be sent to the subscriber on the mobile number or E-mail Address provided by the subscriber. Further, the time and the completeness of the Alerts content and delivery would be entirely based on the service availability of the service provider and its connectivity with other CSPs or the mail server availability of the respective websites. The Alerts are dependent on various factors including connectivity and, therefore, CRA cannot assure final and timely delivery of the Alerts.

1.2.3 The subscriber will be responsible for the security and confidentiality of his/her Mobile Phone/email account to be used for this Facility.

1.3 Process

1.3.1 This Facility provides information to investors over mobile phones and email ids for PRAN getting generated and the units getting allocated in Tier I and Tier II of the account, a day after the units get credited. These Alerts will be sent to those subscribers who have provided their mobile numbers and/or email ids to their nodal offices (like PAOs/DTOs/POPs etc.) while filling a PRAN application form.

1.3.2 The subscriber is duty bound to acquaint himself/herself with the detailed process for using the Facility and interpreting the Alerts for which NSDL is not responsible for any error/omissions by the subscriber.

1.3.3 The subscriber acknowledges that this facility will be implemented in a phased manner and CRA may at later stages or when feasible, add more features. CRA may, at its discretion, from time to time change the features of any Alert. The subscriber will be solely responsible for keeping himself/herself updated of the available Alerts, which shall, on best-effort basis, be notified by CRA through its website or any other medium of communication.

1.4 Receiving the information through SMS and email

1.4.1 The subscriber is solely responsible for intimating in writing to his/her nodal office/POP any change in his/her mobile phone number and/or email id. CRA will send the alerts only to the numbers/email id recorded in it system. Subscriber may also update the mobile number and email id through his/her secured log-in and opts for this facility.

1.4.2 The subscriber acknowledges that to receive Alerts, his/her mobile phone must be in an 'on' mode (reachable) as well as the email id must be 'active'. If his/her mobile is kept 'off' for a specified period from the time of delivery of an Alert by CRA or the email account is no more in active state, that particular information may not be received by the subscriber.

1.4.3 The subscriber acknowledges that the Facility is dependent on the infrastructure, connectivity and services provided by the CSPs /or the e-mail service provider within India. The subscriber accepts that timeliness, accuracy and readability of information sent by CRA will depend on factors affecting the CSPs and other service providers. CRA shall not be held liable for non-delivery or delayed delivery of Alerts, error, loss or distortion in transmission of information to the subscriber.

1.4.4 CRA will endeavor to provide the Facility on a best effort basis and the subscriber shall not hold CRA responsible/liable for non-availability of the Facility or non performance by any CSPs or other service providers or any loss or damage caused to the subscriber as a result of use of the Facility (including relying on the information for his/her investment or business or any other purposes) for causes which are attributable to /and are beyond the control of CRA. CRA shall not be held liable in any manner to the subscriber in connection with the use of the Facility.

1.4.5 The subscriber accepts that each Alert may contain certain account information relating to the subscriber. The subscriber authorizes CRA to send any other account related information, though not specifically requested, if CRA deems that the same is relevant.

1.5 Withdrawal or Termination

1.5.1 CRA may, in its discretion, withdraw temporarily or terminate the Facility, either wholly or in part, at any time. CRA may suspend temporarily the Facility at any time during which any maintenance work or repair is required to be carried out or incase of any emergency or for security reasons, which require the temporary suspension of the Facility.

1.5.2 Notwithstanding the terms laid down in clause 1.5.1 above, either the investor or CRA may, for any reason whatsoever, terminate this Facility at any time. In case the subscriber wishes to terminate this Facility, he/she will have to intimate his/her PAO/DTO/POP accordingly.

1.6 Fees

1.6.1 At present, CRA is levying no charge for this Facility on the subscriber/PAO/DTO/POP. The subscriber shall be liable for payment of airtime or other charges, which may be levied by the CSPs in connection with the receiving of the information, as per the terms and conditions between the CSPs and subscriber, and CRA is in no way concerned with the same.

1.7 Disclaimer

1.7.1 This Facility is only additional information for the investors and is not in lieu of the Transaction Statements required to be provided by the CRA to its clients on a yearly basis.

1.7.2 CRA shall not be concerned with any dispute that may arise between the investor and his/her CSP and makes no representation or gives no warranty with respect to the quality of the service provided by the CSP or guarantee for timely delivery or accuracy of the contents of each Alert.

1.7.3 The Subscriber shall verify the transactions and the balances in his/her account from his/her nodal office and not rely solely on Alerts for any purpose.

1.7.4 CRA will not be liable for any delay or inability of CRA to send the Alert or for loss of any information in the Alerts in transmission.

1.8 Liability

1.8.1 CRA will not be liable for any losses, claims and damages arising from negligence, fraud, collusion or violation of the terms herein on the part of the investor and/ or a third party.

What are all the charges for investing in NPS?

NPS is one of the low cost pension systems in the world. The cost structure is also very transparent and there is no hidden cost.

Some costs like CRA charges, often criticised as high at the initial stage, however, the same would decline with the increase in number of accounts.

The most significant is the fund management charges, which at present is 0.0009% based on assets under management.

Low cost means more amount for investment leading to higher accumulated wealth at the time of termination from the scheme.

Various charges under NPS-Government Scheme, All Citizens Scheme are shown here.