NPS: A retirement fund you must consider this tax season

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Updated: Jan 04, 2019 11:13 AM

NPS has just become entirely tax free and the government has announced an increase in its contribution to 14% from 10% earlier.

NPS, National Payment System, retirement fund, tax planning, tax saving, investment planning for 2018-19, NPS rule change While there are several long-term schemes available in the market, one retirement scheme that has gained popularity in the recent past is the National Payment System.

The current financial year is going to end soon and the tax season has set in. So, tax planning is on everyone’s mind and it’s time to take a close look at investment instruments that are lucrative and tax-efficient. Tax saving schemes are typically long-term and you want to make your picks wisely.

While there are several long-term schemes available in the market, one retirement scheme that has gained popularity in the recent past is the National Payment System (NPS). It has just become entirely tax free and the government has announced an increase in its contribution to 14% from 10% earlier. This scheme has attained a reputation from its launch for being low cost and for offering an additional tax saving benefits of Rs 50,000 under Section CCD (1b) over and above the ceiling of Rs 1.5 lakh under Section 80 (C) of the Income Tax Act. Let’s look at this scheme in detail.

Is NPS a good retirement investment?

A long-term tax-saving investment instrument, NPS matures once you reach the age of 60 years. It invests in a mix of equity and debt and the investor has the flexibility to choose the ratio of contribution in each of the categories. It’s a good option for millennials looking to build a corpus for retirement as it lets you choose your underlying assets basis your risk appetite.

The government has just enhanced the attractiveness by making the corpus entirely tax free as opposed to the previous 40%. Another 40% was required to buy annuity and the remaining 20% was either prescribed for investment in annuity or allowed to be withdrawn upon deduction of taxes as per the applicable tax slab. The government has now relaxed the tax implications on the NPS corpus by making the corpus tax free up to 60%.

Over 18 lakh Central government employees will benefit from the increased contribution of the government from 10% to 14%. This will result in a substantial contribution of 24% including the employer contribution of 10%. Also, it’s low cost and the fund management fee is only 0.1%.

Apart from the tax deductions of up to Rs 1.5 lakh under Section 80 (C), NPS allows you to save additionally under Section 80 (CCD) up to Rs 50,000. So, you get tax deduction benefits of up to Rs 2 lakh under both the sections.

However, like any other retirement scheme, there is a lock-in period associated. Until the investment attains maturity, you are not allowed to withdraw more than 20 per cent of the NPS fund.

(The writer is CEO, BankBazaar)

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