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Sunday, 2 July 2017

Overview of NPS-Additional deduction of 50000.

Subscribers of the National Pension System (NPS) are able to claim an additional deduction of up to Rs. 50,000 for contribution to NPS, over and above the tax deduction of Rs.1,50,000 available to assessees under Section 80C. One need not be a government employee to join the NPS. Any citizen of India between the age of 18 to 60 years can become NPS subscribers. For someone in the 30 per cent tax bracket, this is a clear benefit of Rs 15,000 on investment of Rs 50,000 over and above the Rs 1.5 lakh allowed under Section 80C.

What is NPS?
NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account. Under the NPS, the individual contributes to his retirement account. NPS is designed on Defined contribution basis wherein the subscriber contributes to his own account. The benefit subscribers ultimately receive depends on the amount of contributions, the returns made on the contributions and the period of contributions.
CONTRIBUTIONS + INVESTMENT GROWTH – CHARGES = ACCUMULATED PENSION WEALTH
How to open a NPS Account:
A person can open an NPS account at a post office, a bank (some branches only) or a distributor, technically called point of presence Service Providers (POP-SP). You will have to get a Permanent Retirement Account Number (PRAN) to open an NPS account.  As per KYC norms Photo Id proof, Date of birth proof and Address proof are required to be submitted along with application form. Online registration is also available at eNPS.
Minimum Contribution:
Subscriber has to contribute a minimum annual contribution of Rs.6000/- for his NPS account in a financial year and if not contributed the account will be frozen. In the first year, the account will remain active, but from 2nd year onwards if minimum contribution is not made, account will be frozen. In order to unfreeze the account, the customer has to pay the total of minimum contributions for the period of freeze, the minimum contribution for the year in which the account is reactivated and a penalty of Rs.100/-. In order to unfreeze an account the subscriber has to approach the Point of Presence (POP) and deposit the required amounts. The following table provides the complete information on the minimum contribution requirements:
For All Citizens model
NPS (Tier I)
Minimum Contribution at the time of account opening
Rs. 500
Minimum amount per contribution
Rs. 500
Minimum total contribution in the year
Rs. 6000
Minimum frequency of contributions
1      per year
*All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is like open-ended ended mutual fund. You can take out the money at any time.
Tax treatment on NPS withdrawal and monthly pensions:
NPS has very strict rules on withdrawals and the corpus cannot be taken out before the age of 60. At the time of withdrawal, 40% of the maturity corpus will be exempt from taxes. The balance amount will be taxed based on the applicable tax slab. However, if the balance is reinvested in annuity, then no income tax will have to be paid on the same. Monthly pensions received out of the annuity will be taxable according to your income tax slab.
*An annuity is a financial instrument which provides for a regular payment of a certain amount of money on monthly/quarterly/annual basis for the chosen period for a given price. In simple terms, it is pension. Pension is taxable.

Conclusion
The NPS is drawing attention because of its tax benefit. However, one must remember that NPS falls under the EET (exempt-exempt-tax) regime. Hence, the benefit is just a tax deferral. Instead of paying tax on his income today, one defers the tax payment to a later date (i.e when one turns 60 years of age) when he withdraws the money. Both the lump sum and the income from annuity will be taxed at one’s marginal tax rate. NPS might prove to be a better bet from the RoI perspective, if one can manage a lower marginal tax rate at the time of withdrawal. Buying an annuity may not be the optimal choice for returns when one retires. While NPS offers a tax break now, the benefits after retirement seem constrained. One must not base his decision purely on tax incentives on his current income. One should consider the taxation during withdrawal. One must decide by evaluating the product based on two key parameters: Does the product fulfil a need like no other product in the market. Will the post-tax return scenario be in his favour, compared with other EEE investments such as PPF, EPF and ELSS? One might be better off with the EEE choices.
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