NPS offers you to save for your golden years with tax benefits on your investments. However, the amount of pension is not guaranteed and depends on the accumulated corpus and rates available at the time of vesting.
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:
| 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| Withdrawal in other case | Post attaining 60 years – 60% can be withdrawn
Prior to 60 years – 20% can be withdrawn | Can be withdrawn anytime |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 | ||
How does the scheme work?
After attaining the age of 60 years, close to 60% of contributions can be withdrawn and the remaining 40% has to be used to purchase an annuity from an approved life insurer.
Annuity is a series of payments made at fixed intervals of time. Annuity plans necessitate the insurer to pay the insured an income at regular intervals until his/her death or till maturity of the plan. The most popular plan opted for by a majority is annuity till life with return of purchase price.
Let us understand this with an example:
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).
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 |
Data as of 30th April 2015; returns are annualized.
As can be seen, the returns are pretty attractive for an individual to consider investment in NPS.
Advantages:
>> One of the cheapest pension products - Very nominal fund management charges compared to mutual funds and insurance plans.
>> Choice of fund managers - Private sector NPS subscribers have the choice of 6 fund managers and they are allowed to switch from one to another, giving them the option of choosing the best fund manager.
>> Tax advantages - Rs. 50,000 under section 80CCD, exclusively for NPS.
Disadvantages:
>> Restricted Liquidity - There are restrictions on premature withdrawal from Tier I accounts making the scheme very rigid. Only 20% can be withdrawn prior to reaching 60 years.
>> Restrictions on equity exposure - The exposure to equity investments is restricted to a maximum of 50%. People in the young age group who can take higher risks may see this as a disadvantage as they might be losing an opportunity.
>> Taxation on maturity – Taxation method for NPS is EET (Invested amount – Exempt; Interest Income – Exempt; Withdrawal and Annuity – Taxed), whereas taxation method for PPF and ELSS is EEE (Invested amount – Exempt; Interest Income or Dividend – Exempt; Withdrawal – Exempt). Thus it is not tax efficient to use the limit under section 80C to invest in NPS.
>> No guarantee on better returns - The NPS is not a defined benefit plan. It is a defined contribution plan. The returns are market linked and there is no guarantee of returns. This is not really a disadvantage, but actually an uncertainty. As the subscribers have the choice of investing 100% of the funds in Government securities wherein returns are more or less assured. Hence, the uncertainty is actually a matter of choice.
What should one do?
One should use 80CCD deduction to avail the benefit of NPS and the maximum amount per annum should be restricted to Rs. 50,000 and Section 80C can be used for other investment products.
An employer's contribution to NPS, on behalf of the employee, forms a part of salary of the employee and there is no limit for this contribution (as per tax perspective). Hence every employer could consider NPS as a part of salary structure.
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