But not making National Pension Scheme tax-free at time of withdrawal a dampener
The Budget 2015-16 has given a boost to retirement savings by giving further tax incentives on the National Pension Scheme (NPS).
Finance minister Arun Jaitley, in his first full Budget, announced tax benefit on investments of up to R50,000 in a year under Section 80CCD, which is over and above the deduction available on R1.5 lakh under Section 80C. Clubbing the two sections of the Income Act, an individual can claim total tax benefit of R2 lakh, provided R50,000 is invested in the NPS.
So, from the next financial year, an individual taxpayer can either invest up to R1.5 lakh in Section 80C instruments, such as Public Provident Fund, Employees’ Provident Fund, equity-linked savings scheme of mutual funds, premiums paid towards life insurance, five-year bank or postal term deposits, and deposit R50,000 in the NPS to get a total deduction of R2 lakh. Alternatively, one even can invest the entire amount of R2 lakh in NPS to claim the deduction (Sections 80C and 80CCD).
The government will bring in a legislation where the salaried class segment would have an option to choose between NPS and EPF contribution for securing their retirement kitty.
A pure defined contribution pension product, NPS was introduced in 2004 for government employees and, in 2009, it was extended to all private sector employees.
For, non-government employees, up to 50% of the contribution can be invested in equities and the rest between corporate and government debt paper. The minimum investment for private individuals is R6,000 a year (there is no upper limit of investment) and, on maturity, one gets 60% of the net asset value as a lump sum, while the rest in invested to buy annuity.
However, the government has not made NPS tax-free at the time of withdrawal. While the investments and interest accumulations will not be taxed, the money would be taxable at the time of withdrawal. In products like PPF and EPF, it is tax-exempt at all the three stages — investment, accumulation and withdrawal. Even the commutable income from pension plans of insurance companies is tax-free on maturity.
As a result, while NPS may generate higher returns than EPF because of investment in stocks, post-tax, NPS will lose out against EPF and PPF.
Analysts say if the government makes NPS tax-exempt at all the three stages, investors can benefit from the Budget proposal by investing R2 lakh in the scheme every year till retirement to build a sizeable retirement kitty.
Assets under management (AUM) of the NPS increased from R48,136 crore as on March 31, 2014, to R72,000 crore as on December 31, 2014, according to Economic Survey 2014-15. As on December 31, 2014, NPS had about 79.71 lakh subscribers, which included Central and state government employees. At present, there are seven pension fund managers, but only three of them — LIC Pension Fund, SBI Pension Fund, and UTI Retirement Solutions — are allowed to manage the pension corpus of government employees.
To invest in PFRDA-regulated NPS, one has to open an account with any one of the points of presence (POPs) and get a Permanent Retirement Account Number (PRAN). One can choose the investment according to their preference and opt for a pension fund manager.
The individual can operate the account from anywhere in the country, even if one changes job or moves to another city.
The subscriber can contribute the amount through cash, local cheque, demand draft or the electronic clearing system at his chosen POP-SP. An individual will have to comply with the Know Your Customer (KYC) norms and, after the account is opened, the central record keeping agency will dispatch the subscriber’s unique PRAN Card, which will be the primary means of identifying and operating the account.
An individual will also receive a telephone password (TPIN), which can be used to access the account on the phone and an internet password for accessing the account on the CRA website.
The NPS offers an easy option of investment called auto choice lifecycle fund, where money is invested across three asset classes — equity, government debt and corporate debt. At the lowest age, the auto choice will entail investment of 50% of the money in equity, 30% in corporate debt and 20% in government debt. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 35.
From 35 onwards, the weight in equity and corporate debt will decrease annually and that in government securities rise till it reaches 10% in equity, 10% in corporate debt and 80% in government securities.