Juzer GabajiwalaVentura SecuritiesThe National Pension Scheme (NPS) was introduced by the Government in 2004. It was launched under a separate regulatory body called the Pension Fund Regulatory and Development Authority (PFRDA). The objective is to provide a pension plan to the aging population of the country post-retirement. The country, to date, lacks a pension plan for its citizens in the private sector. Pension plans are only available to the employee in the Government sector and that too these are not driven by contributions but consist of fixed pay-outs, based on the last pay drawn. The launch has been pretty much muted mainly due to the fact that there have been no incentives (in the form of tax breaks) to the individual and also there is no motivation to financial advisors (extremely low commission). A recent change in the Income Tax Act has finally made it attractive to an individual wherein an additional deduction of Rs 50,000 is provided against contributions to a pension plan under section 80CCD. This is over and above the limit of Rs 1.5 lakhs under section 80C.Thus let us check what is NPS about and how it could be beneficial to you:Features:
Types of investment | Tier I Account | Tier II Account |
Who can Invest | All citizens of India between the age of 18 and 60 years | |
Liquidity | Non-withdraw able account | Voluntary savings facility |
Minimum contribution (p.a.) | Rs. 6,000/- | Rs. 2,000/- |
Number of yearly installments | Minimum one | |
Withdrawal on Death | Entire corpus will be paid to the nominee | |
Withdrawal in other case | Post attaining 60 years – 60% can be withdrawn Prior to 60 years – 20% can be withdrawn | Can be withdrawn anytime |
Contribution per installment | Minimum Rs. 500/- | Minimum Rs. 250/- |
Maximum contribution | No limit | |
Deduction | Additional Rs. 50,000 under section 80CCD | Not available |
Taxation on Withdrawal | Taxable | |
Taxation on Annuity |
Amount (in Rs.) | |
Invested amount (over a period of time) (A) | 1,00,000.00 |
Assumed corpus at the age of 60 (B) | 5,00,000.00 |
Withdrawable Amount (after 60 years of age) Taxable as Income from other source (60% of B) | 3,00,000.00 |
Amount used to purchase annuity (40% of B) | 2,00,000.00 |
Annual Income after retirement** Treated as salaried Income (assumed at market rate of 8.5%) | 17,000.00 |
** Annuity can be paid monthly, quarterly, half yearly or yearly as per the option chosen by the investor (on market rates).Tax Benefits:The limit on deduction under section 80C is Rs 1.5 lakhs. This limit is for multiple options like Equity Linked Saving Schemes (ELSS), Life insurance, PPF, NPS, etc. It is advisable not to use this limit for NPS as using it under section 80CCD will render an additional tax deduction. In Budget 2015, to provide a social safety net and the facility of pension to individuals, an additional deduction of Rs. 50,000 is provided for contribution to the NPS under Section 80CCD of the Income Tax Act, 1961.Employers can also contribute upto 10% of basic salary to NPS. The amount paid by the employer to NPS would not directly form part of the taxable income of the individual. Returns: Below are returns of few NPS investments of 1 year and 3 years:
Categ-ories | SBI | LIC | UTI | ICICI | Reliance | Kotak | HDFC | |||||||
Period | 1 Yr | 3 Yrs | 1 Yr | 3 Yrs | 1 Yr | 3 Yrs | 1 Yr | 3 Yrs | 1 Yr | 3 Yrs | 1 Yr | 3 Yrs | 1 Yr | 3 Yrs |
Equity | 23.7% | 18.0% | 22.2% | NA | 24.0% | 18.1% | 24.0% | 18.2% | 23.7% | 17.8% | 23.7% | 18.0% | 23.8% | NA |
G-Sec | 19.4% | 11.0% | 19.5% | NA | 18.8% | 11.1% | 19.1% | 11.4% | 18.8% | 11.1% | 17.9% | 10.9% | 18.5% | NA |
Corpor-ates | 14.7% | 11.2% | 14.5% | NA | 14.0% | 11.1% | 15.7% | 11.9% | 14.6% | 11.7% | 14.4% | 11.6% | 14.6% | NA |
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