The National Pension Scheme (NPS), a retirement saving scheme launched by the government, has drawn many investors as it allows an additional tax deduction of Rs 50,000 under Section 80CCD (1b). The fund under this voluntary scheme is invested in a mix of equity and debt securities depending on the investors’ choice or his/her age in case of no preference.
Although, there is no upper limit to the amount you can invest with NPS, the minimum is Rs. 6,000 per year.
Recent Developments: Taxation of NPS & Tax Savings
According to developments in the Union Budget 2017, no tax would be imposed on partial withdrawals amounting to less than 25% of the investment made towards your NPS fund. For example, if you have contributed Rs 3 lakh towards NPS and the fund value stands at Rs 4 lakh at present, you are exempted from tax on withdrawal of Rs 75,000.
According to the new government proposal, the corporate-employed and self-employed are taxed equally. While earlier the self-employed were allowed deduction on the 10% of the income contributed towards NPS, they are now exempted up to 20% of their income. In case of corporate employees, 10% is contributed by the employee and 10% is provided by the employer. However, the employee enjoys tax deduction on the joint contribution.
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Withdrawal of an NPS fund on maturity is tax-free up to 40% of the total accumulated amount. On maturity, an investor has to utilize at least 40% of the corpus in purchasing annuity and this amount is tax-free. NPS also allows an additional deduction of Rs 50,000 on the gross taxable income over and above the deduction of Rs 1.5 Lakh under Section 80C.
Investing in NPS
In order to invest in NPS, you have to register for the scheme on any bank website, following which a permanent retirement account number (PRAN) will be generated.
To further confirm the PRAN, you have to send requisite documents such as copies of proof of identity and residence to the central office of the bank. Once the documents are verified, you can start investing in NPS. Your first contribution should be made within 45 days of the PRAN generation.
Most banks are designated point of presence service provider for NPS and they serve as consumer interface for registering with the scheme. You can also open it through the depositories.
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What’s Best About NPS?
NPS allows the contributor to choose the type of asset classes he or she would like to invest in. The composition of equity and debt is different for different investors. If the contributor does not decide on the proportion on his own, the mix is decided by an automated system based on the age of the contributor.
While someone at an early stage in life has more fund in equities and less in debt, someone older has typically more in debt, as equities are riskier compared to debts. While debt instruments or government securities come with assured returns, returns from equities fluctuate based on multiple economic factors. Equities tend to do better in the long run because a longer tenure balances out the fluctuations in the market.
(The author is CEO, BankBazaar)