As we would end the financial year in couple of months from now, we are quite sure that many of you would be busy evaluating investment avenues to save tax prudently. There are of course galore of avenues through which you could undertake your tax planning activity prudently, but in this edition we thought of apprising you all about the New Pension Schemes (NPS).NPS was earlier available only for Government employees, but later on May 1, 2009 also introduced for people in the unorganised (private) sector, as need for deeper participation in the pension contribution (through this product) was felt.
For you to invest in NPS, you as an individual are eligible, provided you are 18 years of age and until your age of 60. If you belong to the unorganised sector (i.e. private sector); the contributions done by you towards the scheme would be voluntary, and you can invest in any of the two under-mentioned accounts:
In this account your minimum investment amount is Rs 500 per contribution and Rs 6,000 per year, and you are required to make minimum 4 contributions per year. Under this account, premature withdrawals upto a maximum of 20% of the total investment is permitted before attainment of 60 years, however the balance 80% of the pension wealth has to be utilised by you to buy a life annuity.
For opening this account you will have to make a minimum contribution of Rs 1,000 per annum. The minimum number of contributions is 4, subject to a minimum contribution of Rs 250. However, if you open an account in the last quarter of the financial year, you will have to contribute only once in that financial year. You will be required to maintain a minimum balance of Rs 2,000 at the end of the financial year. In case if you don't maintain the minimum balance in this account and do not comply with the number of contributions in a year, a penalty of Rs 100 will be levied. Moreover, in order to have Tier-II account, you first need to have a Tier-I account. Tier-II account is a voluntary account and withdrawals are permitted under this account, without any limits.
It is noteworthy that even if you hold both the above accounts under NPS, only the Tier-I account will be eligible for tax benefits.
While investing money in NPS, you have two investment choices i.e. "Active" or "Auto" choice. Under the "Active" choice asset class, your money will be invested in various asset classes viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities) and G (Central Government and State Government bonds); where you will have an option to decide your asset allocation into these asset classes. In case of Auto Choice, your money will be invested in the aforesaid asset classes in accordance with predetermined asset allocation.
But remember, the return on your investment is not guaranteed as it is market-linked. At your age of 60 years, you can exit the scheme; but you are required to invest a minimum 40% of the fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in lump sum or in a phased manner upto your age of 70 years.
What about the structure and regulation?
The structure of the NPS includes the regulator - Pension Fund Regulatory & Development Authority (PFRDA), a trust set up under the Indian Trusts Act, 1882, 22 Points of Presence (PoP) acting as first point of interaction with the subscribers, NSDL as the central record keeping agency, six fund managers - State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance to choose from, and Bank of India as the trustee bank. Last year, the Pension Fund Regulatory and Development Authority (PFRDA) issued a revised set of guidelines (as per the recommendations of the Bajpai Committee) for registration of Pension Fund Managers (PFMs) to manage the NPS for the non-government and private sector. The revised guidelines have done away with the earlier bidding process, wherein a pre-determined number of slots were bid for by the fund managers thereby encouraging all interested players desiring to enter the Pension industry to register as PFMs subject to the eligibility criteria laid down. Furthermore, the PFMs will now be allowed to prescribe their own fee charges, subject to an overall ceiling to be laid down by PFRDA. The new guideline were intended to provide an economically viable business model for the PFMs attracting a fresh set of entrants into the pension industry, and the resultant competition would ensure market driven fee structures, which would work to the advantage of the pension subscribers. Thus the structure of NPS appeared to be rewarding.
But is investing in NPS really rewarding?
Well,in our view this product is not very appealing for creating a substantial corpus to meet your retirement need. Rather, if you chalk-out a prudent financial plan with the help of a financial planner, and invest wisely as per the plan laid out (which would mostly recommend you equity allocation at younger age, and then as your age progresses balance the asset allocation between equity and debt instruments), then the corpus which you would be able to create will be substantial enough to meet your retirements needs. Also under this scheme, when one withdraws money, at the age of 60 it is taxable. Thus although the revised guideline are making the structure to look attractive on the face of it, NPS has faltered in its goal of attracting more investors although it provides a deduction under the Income Tax Act, 1961.
Deduction: Those who are salaried employees may claim deduction under section 80 C upto Rs 1 lac for their own contributions towards NPS account. In addition to this, they are entitled to claim deductions under section 80 CCD for contributions made by their employer upto 10% of their salary. For this purpose salary construes as Basic salary plus dearness allowance. It is noteworthy that the deduction under section 80CCD can be claimed over and above the permissible deductions under section 80C.
However, those who are self-employed can avail deduction under section 80CCD upto 10% of their gross total income (which is comprised of income computed under different heads before reducing it by all other deductions available under section 80.) In addition to deductions under section 80CCD, self-employed people are also entitled to deductions under section 80C for other instruments eligible therein.
You make things simple by breaking them into tier 1 and tier 2. I understand it fully now!
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