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Improved New Pension System – A Part of Your Portfolio

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Improved New Pension System – A Part of Your Portfolio

Why the improved NPS should be a part of your portfolio?

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 The deal is getting sweeter each year for the voluntary pension scheme New Pension System (NPS), ever since it was thrown open to the non-government employees in 2009.

Starting April 1, 2016, the withdrawals up to 40% of the total corpus accumulated from NPS on maturity have been made tax free, as per the Union Budget 2016-17. Hitherto, the entire amount received from NPS at maturity was taxable.

Two more changes have been made during the Budget. “The whole amount received by the nominee, on the death of the assessee shall be exempt from tax,” the Finance Bill 2016 states.So any amount received as a pension or as a lump sum at the time of maturity in the hands of the heir post death of the NPS subscriber would not be taxed.

Also, if you are looking to shift from your Employees Provident Fund, any other Recognised Provident Fund or superannuation fund to National Pension System Exemption then exemption of taxes is proposed for one-time portability.

These three measures are like the cherry on topping when considered together with Budget 2015-16 announcement of offering additional deduction of Rs 50,000 under Section 80CCD(1B) for contributions made to NPS. Together with the Section 80CCE benefit, the total tax deduction available through NPS is Rs 2 lakh. As a result, someone in the highest tax bracket can save Rs 15,450.

Looking to jump head on into the scheme? Let us help you understand it better.

NPS is a defined contribution-based pension scheme aiming at providing old-age income, based on market returns and can be used by anyone in the age group of 18 and 60 years through nearly all private and public sector banks and other authorised points of sale. You can open Tier – I and Tier – II accounts, wherein the former cannot be withdrawn until you turn 60 and Tier – II account can be withdrawn. Note however, that only the Tier – I portion would qualify for tax deduction.

If you are retiring early then avoid the temptation to withdraw before you turn 60 years as 80% of the corpus would have to be used to purchase an annuity, instead of 40% after the maturity at 60 years. An annuity is nothing but an insurance company offering wherein a lump sum is invested to get a monthly pension.

If you are looking to invest during the current financial year as clarity has emerged on the maturity taxation front, then going by the physical form-filling wouldn’t get you past account opening stage prior to March 31, 2016. A faster way out is to apply online through one of the 17 banks empanelled with the National Securities Depository Ltd (NSDL). Remember, this can be done only if your PAN and Aadhar Card is linked to your account number as the bank would clear the application if Know your customer requirements are fulfilled and updated.

Using a one-time password received on registered mobile number one can submit the application online and get a Permanent Retirement Account Number (PRAN) to start investing in the scheme. One can invest through credit and debit cards but 1% additional charges would be levied.

A minimum of Rs 500 needs to be contributed while opening the Tier – I account and Rs 1000 in the case of Tier – II account. During a financial year, a total of Rs 6,000 needs to be contributed for Tier- I and Rs 2,000 for Tier – II. Just like provident fund, you need to make at least one contribution to keep the scheme active.

Initial registration would cost you Rs 100, a post which 0.25% of each contribution would be collected as charges, with a cap of Rs 25,000 maximum. The fund management fee of 0.01% charged under NPS is one of the lowest.

If a 25-year old starts investing Rs 1000 per month (Rs 4.2 lakh over 35 years) in NPS and considering his wealth grows at 8% per annum, he would have built a pension kitty of Rs 22.79 lakh. Considering he opts to buy an annuity using 60% (Rs 9.11 lakh) of this amount, he would get a pension of Rs 9,117 each month after he/she turns 60 years.

About Author/ Resource Box:
H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online

HRBlockIndia
HRBlockIndia
H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online.

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