CA Deepak Jauhari
(WITH THE RECENT CHANGES MADE BY GOVERNMENT)
Background: The National Pension Scheme (NPS) was initially introduced for the Government employee. However, w.e.f from 1st May, 2009, any Indian citizen between 18 to 60 years of age can join the scheme.
A subscriber under NPS is entitled to get additional tax benefit up to Rs. 50,000 in a financial year under section 80CCD (IB) of Income Tax Act. This is over and above the deduction of Rs. 1,50,000 available under section 80C /80CCE of Income Tax Act .
The Union Cabinet recently on 10.12.2018 approved a host of changes in NPS. Apart from higher contribution from the Government/Employer into the NPS, the Cabinet also made tax free withdrawal on retirement very attractive. Earlier the tax free withdrawal on retirement was allowed only to the extent of 40% which is increased to the extent of 60%. Presently only 10% of the salary was allowed to be contributed by the employer in the NPS, which is increased to 14% of Salary ( Basic + DA).
1. Type of Account under NPS
Tier I Account: Non- withdraw able a/c meant for retirement. (With Tax benefit)
Tier II Account: Simply a savings account. (Without tax benefit)
2. Tax Benefit on Contribution to NPS
|Employee Contribution||80CCD (1)||Deduction up to 10% of Salary (Basic + DA) or 10 % of GTI ( for self-employed taxpayer).This is within the overall ceiling of Rs.1,50,000 u/s 80C/80CCE|
|Employee Contribution (Additional Deduction)||80CCD (IB)||Further deduction up to Rs. Rs.50,000.This is over and above of Rs 1,50,000 u/s 80C/80CCE|
|Employer Contribution||80 CCD (2)||10%* (14% from 01.04.2019) of salary (Basic + DA).This can be claimed as business expenses u/s 36 of IT Act.|
3. Classes of Assets for Investment
Subscribers can select any of the two investment options to select scheme under that:
Auto Choice: Under this option, funds of subscriber are automatically allocated amongst three funds E, C and G in a pre-defined portfolio pattern prescribed by PFRDA. When a subscriber chooses this option, it adopts a lifecycle-based approach, in which the allocation to different asset classes changes gradually as the person’s age increases. You will be given three types of funds to choose from as follows:
|Fund Nature||Fund Type||Equity allocation|
|Aggressive Fund||Type E||Maximum equity allocation 75%|
|Moderate Fund (default option)||Type C||Maximum equity allocation 50%|
|Conservative Fund||Type G||Maximum equity allocation 25%|
Active choice – Under this option, subscriber selects the allocation pattern amongst the three types of funds namely E, C and G. The Maximum allocation to Equity can be 75% and 100% in Corporate or Government Securities.
Note: NPS subscribers can change their investment option and asset allocation ratio ‘twice’ in a year. However, you can select the pension fund manager only once a year.
4. The Pension Fund Managers (PMC) :At present there are 8 PFMs. These are UTI, SBI, LIC, Kotak, Reliance, ICICI Prudential. HDFC, Birla Sun Life.
5. Regulator of NPS :It is regulated by Pension Fund Regulatory & Development Authority (PFRDA) .
6. Past Performance of Various Schemes Run By Different PMC ( As on Jan 2019)
Performance Of Equity Funds – Scheme E
Comments : Best Fund Manager HDFC
Performance of Scheme-G Category (Government Securities)
Comments : Best Fund Manager LIC Pension Fund
Performance of Scheme-C (Corporate Debt Securities)
Comments : Best Fund Manager ICICI Prudential Fund
7. Withdrawal of Corpus on Retirement
Currently, on retirement or on reaching the age of 60, NPS subscribers are allowed to withdraw 40% of the corpus while 40% has to be invested in annuity plans for getting regular pension payouts. Balance 20% of the Corpus is Taxable, if withdrawn otherwise the same is also to be used in purchase of annuity. In nutshell only 40% can be withdrawn without any tax implication but this limit has been increased to 60% which is applicable from 01.04.2019.That is why NPS scheme is said to be improved by the recent amendment.
8. Pre- Mature Withdrawal From NPS: Pre mature withdrawal is not allowed from the scheme, however for some specific purposes (say Higher education of children, marriage of children, Housing etc.) can be withdrawn only up to the extent of 25% of employee contribution. Let us suppose there is a corpus of Rs. 15 Lacs of an employee Mr X which consist of Employee portion of Rs. 7 Lacs and Rs 8 Lacs of Employer. This corpus of employee consists of Rs 6 lacs of contribution and Rs 1 lac of accretion .Here 25% out of contribution i.e. Rs 1.50 Lacs (25% of Rs 6 lacs ) only can be allowed to be withdrawn
9. Pre- Mature Exit/Closure From NPS: Only 20% of the corpus will be Tax free and remaining 80% of corpus will be utilized for purchase of annuity.
10. Death Benefit: Lump sum withdrawal by the nominee shall be exempt from Income Tax. If, annuitized by nominee, the pension income will be taxed as per nominee’s income tax slab.
11. Accumulation Of Corpus and its Taxability on Retirement : Suppose an young employee Mr.X ,at the start of his career enters into the scheme of NPS and contributes Rs 50,000 per annum u/s 80CCD (IB ) for 30 Years for up to the age of retirement ( 60 Years). As per the past history, it is assumed it will fetch on an average return of 10% per annum. His total corpus will be Rs 95 Lacs at the age of 60 Years. Then as per the amended rule, he will be entitled to tax free withdrawal for up to 60% of the corpus i.e. Rs. 57 Lacs (Rs.95 Lacs *60%) and on the balance of Rs 38 lacs (Rs (95-57) he will get pension as per the scheme selected by him.
While it is true that NPS returns are market-linked and therefore bound to be volatile even for Bond and Government Securities .But if remain invested for longer period of time, return may be higher than the return on traditional investment. From the above tables it can be seen that It is fetching a return of around 9 % to 12% for 5 years period depending on the choice of asset class. Since the tax deduction of Rs 50,000 is available under a separate section (other than the section 80C), it appears to be prudent to avail the benefit.
At the time of retirement we will be getting 60% out of the total corpus as tax free withdrawal. This is to be appreciated that out of total corpus we have contributed only 70% and the balance 30% is from tax deduction benefit. Therefore, it looks attractive that out of the total contribution we will be getting 60% tax free back on retirement and from the balance of 10% we will be getting pension for 40% corpus. Looking to the benefit under NPS many Corporate are shifting from own pension scheme to NPS scheme.
Disclaimer: The matter discussed above is the personal views and opinion of the author. Therefore it is advisable to consult your investment advisor before taking any decision and entering into the scheme.
Author can be reached at firstname.lastname@example.org