NPS Tax Bonanza: New rule may add Rs 10 lakh to retirement corpus of voluntary investors

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Published: December 13, 2018 11:31:47 AM

The new sops for NPS not only make the pension system attractive for government employees, who joined services after December 31, 2003, but the tax incentive makes it attractive for voluntary investors too.

National Pension System, NPS, tax benefits, insurance plans, pension plans, tax deductions, 80CCD, 80C benefits, retirement corpus, tax-free commutation, NPS tax benefitsAs per the NPS rule, 40 per cent of the retirement corpus must be invested in a pension plan of any IRDAI governed insurance company.

The new sops for National Pension System (NPS) not only make the pension system attractive for government employees, who joined services after the conventional pension system ceased on December 31, 2003, but the tax incentive makes it attractive for voluntary investors too.

The government employees, who joined on or after January 1, 2004, have to contribute at least 10 per cent of the basic salary to NPS fund, while the government also used to make matching contribution of 10 per cent of basic salary. The government has now increases its contribution part to 14 per cent, which would give a big boost to retirement corpus of its employees.

As per the NPS rule, 40 per cent of the retirement corpus must be invested in a pension plan of any IRDAI governed insurance company and remaining 60 per cent may be commuted at the time of retirement or after attaining the age of 60 years. At the inception, the entire retirement corpus was taxable, which was relaxed later and 40 per cent of the commutation part was made tax free. Probably, the aim of the government was that the beneficiaries would invest the taxable 20 per cent also (that is total 60 per cent) in pension fund to delay the tax liability.

However, in the recent notification, the entire commutation part, that is 60 per cent of the retirement corpus, has made tax free. Which would not only enhance the take home lump sum commutation part, but would also give flexibility to a willing person to invest the amount in a pension fund at a time when the rate of pension becomes higher, in case of a low-rate regime at the time of retirement.

With the opening of the door of NPS for normal persons (apart from government employees) and making contribution up to Rs 50,000 tax deductible u/s 80CCD, which is over an above the Rs 1,50,000 investment limit u/s 80C, government has made the pension scheme an attractive choice for individuals also.

If a 25-year old newly employed salaried person start investing Rs 50,000 at the beginning of every financial year, for 35 years till retirement, assuming a conservative CAGR of 10.5 per cent, he or she would accumulate a retirement corpus of Rs 1.68 crore, out of which 20 per cent commutation part or Rs 33,60,000 was earlier taxable. Assuming that at the time of retirement, the person reaches the tax bracket of 30 per cent, the tax liability for him or her would be Rs 10,08,000, which may be saved now due to the tax incentive. So, the investor would get additional benefit of Rs 10 lakh through the way of tax savings.

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