When it comes to investing, Indians are a conventional lot that prefers traditional instruments offering security over high-yielding investment vehicles. Perhaps this is why fixed deposits (FDs) are still preferred by millions of Indians over investment avenues like equity funds, which fetch higher returns but at considerably higher risk.
In a move that appears to bridge the chasm, finance minister Arun Jaitley announced a boost for the National Pension Scheme (NPS) in the Union Budget 2015-16. As an investment vehicle, NPS has been around for some years now, albeit in a slightly different avatar. Here is a closer look at its antecedents and the shape it is likely to take in coming days.
The NPS of yore
The concept of NPS was promulgated in 2004 under the Pension Fund Regulatory and Development Authority (PFRDA). A new concept then, it was aimed at offering security and returns for senior citizens when their regular income sources dried up.
The NPS is one of the many financial vehicles offering tax savings up to R1.5 lakh under Section 80C of the Income Tax Act while also catering to retirement planning. Both salaried and self-employed individuals were allowed to invest directly in NPS and claim tax deductions under Section 80C. The maximum possible deduction previously under NPS was R1.5 lakh under Section 80C of the I-T Act.
Following the finance minister’s announcement, under section 80CCD, there is an additional tax deduction now for investments of up to R50,000 in the NPS. This means, over and above the exemption of R1.5 lakh under Section 80C, NPS investors can enjoy an additional deduction of R50,000 under Section 80CCD. So, the total tax deduction for investors in NPS stands at a maximum of R2 lakh, making it one of the most attractive investment schemes for taxpayers. Except the additional tax deduction limit, other features of the scheme remain the same.
If the NPS’ initiation was considered the first step in providing Indians with a powerful retirement tool, the tax deductions announced by the FM are likely to offer greater impetus to retirement planning.
Before you invest
Given the additional sops, many more are likely to consider NPS as a tax-saving tool as the financial year draws to a close. The funds pooled under NPS are invested in various sectors, including government bonds, shares, corporate debentures and bills. The returns are based on the interest earned under different market conditions. As far as risk is concerned, it is less compared to equities and other funds, but it does not offer guaranteed returns, unlike bank FDs or Public Provident Fund (PPF). Investors can choose the fund manager and switch funds to get maximum returns. Withdrawals from the corpus are permitted and minimum 40% of the pension is fixed for purchase of life annuity. Returns from NPS are taxable.
By Adhil Shetty
The writer is CEO, BankBazaar.com