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.
For further queries do reach us at info@preethamandco.com
For further queries do reach us at info@preethamandco.com
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