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Why NPS is a Flop ?

npsBudget 2009-10 proposed to exempt the income of the New Pension Scheme (NPS) Trust from income tax and dividend distribution tax.

It also exempt the trust from paying the securities transaction tax on purchase and sale of equity shares and derivatives, steps that could lower the cost for NPS subscribers.

The finance minister also proposed allow self employed persons to participate in the NPS and avail the tax benefits.

As you are aware NPS was open to public on May 1 2009, and up to 50 percent of amount collected through NPS could be invested in stock markets the fund managers of NPS appinted by the Govt.

Reliance Capital, UTI, State Bank of India, IDFC, ICICI Prudential Life Insurance and Kotak Mahindra Bank are currently the fund managers in this pension product.

Finance Minister Pranab Mukherjee announced these measures to support the New Pension System (NPS) but will these measures help to re-vitalise the NPS ?

However, experts say there are few takers for the NPS, as it still continues to be under the exempt-exempt-taxed (EET) regime with the maturity amount being taxed unless the money is used for buying annuity in the same financial year.

This is unlike other competing products like Provident Fund (PF) and Public Provident Fund (PPF), which continue to enjoy the exempt-exempt-exempt (EEE) regime and not taxed at any stage.

That explains why only 800-900 non-government applications with a total investment of up to Rs 15 lakh have fallen in its lap since May versus Rs 2,500 crore invested by government employees, who have joined service after 2004.

Experts believe unless PF and PPF schemes are brought under similar tax structures, NPS is unlikely to pick up and nor will the benefits accrue to the stock market.

Experts say seventy per cent of Indians are under the age of 35. If you can channelise even a small proportion of their current earnings into equity market through NPS, it would mean long term and domestic money coming in.

It appears that NPS would still take time for the NPS to pick up.

But unless tax structures are brought at par with other tax saving schemes, there is little hope for the product.