Individuals who are still sticking to the old tax regime, which offers various tax deductions, should invest in the National Pension System (NPS) to save tax. Even those who have opted for the new tax regime, which does not offer any deduction, should also invest in the pension scheme to build a tax-free retirement corpus with higher returns.
Individual subscribers get a tax deduction of up to Rs 1.5 lakh under Section 80C of Income Tax Act and an additional deduction of Rs 50,000 under section 80CCD 1(B). Also, NPS contributions by employers (up to 10% of the salary) is allowed as a deductible perquisite for employees under Section 80CCD(2), subject to a ceiling of Rs 7.5 lakh in a financial year.
Investment mix
The funds are invested in equity, government securities and corporate bonds and the returns vary according to the portfolio-mix. Investors must review the performance of the funds every year. There is no tax implication of switching from one fund to another for investing in equity, corporate bonds or government securities.
Under the active mode, a subscriber decides on the asset allocation percentage in different classes subject to their upper limits. And in the auto mode, the asset allocation is decided by the age of the investor. Harshad Chetanwala, co-founder, MyWealthGrowth.com, says it is always good to check how your fund is doing compared to its peers and review the portfolio and performance on a periodic basis.
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Maturity of NPS
On retirement, subscribers of NPS have to withdraw 60% of the corpus and the remaining amount will have to be invested in annuities. The 60% lumpsum amount received by the subscriber is tax-free and the remaining amount invested for purchasing annuity is also exempt from tax. So, it is exempt-exempt-exempt at all the three stages, which makes it the most cost-effective retirement product.
Any amount withdrawn from NPS for emergency purposes is tax-exempt under Section 12B. Moreover, Goods and Service Tax paid by an individual while purchasing an annuity product is not levied when an annuity plan is purchased through NPS. However, monthly annuity income received by the investor is taxed as per marginal rate.
Subscribers have the option for systematic lump sum withdrawal on a periodical basis — monthly, quarterly, half-yearly or annually till the age of 75 years. The facility is for both Tier I and Tier II accounts and is available only for normal exit and not for premature exit or exit due to the death of the subscriber. In fact, the staggered withdrawal process is an ideal mechanism to earn higher returns as corpus continues to remain market-linked for 15 years.
Fixing annuity
Selecting the annuity option is subjective and based on the needs of the investor. Subscribers can choose from the various annuity schemes offered by 15 life insurance companies empanelled with the NPS. Life insurers offer various types of annuity plans such as annuity for life for the subscriber, annuity for life of the subscriber and then to the spouse after the subscriber’s death, annuity for life and purchase price returned after the death of the subscriber, etc.
Sushil Jain, CEO, PersonalCFO.in, a wealth management firm, says the annuity service provider should have a good track record along with good size of corpus under management. “It should have a presence across India, especially in your area and should be accessible though physical as well as online. So that there should not be any problem in case of family pension as well as return of purchase price along with submission of documents for updating in case of any changes,” he says. Investors must keep in mind that the annuity received is taxable at one’s marginal rate.