The Finance minister, in the latest general budget, has offered an additional and exclusive tax incentive of Rs 50,000 for investments in New Pension System/Scheme (NPS). Coupled with an additional tax incentive that is exclusively available to NPS investors, the scheme has created a lot of excitement, especially among the salaried employees. In this post, we discuss what NPS is all about, its salient features and various positives and negatives of the scheme. Finally, we weigh various pros and cons of the scheme and share our recommendation on the product. Let’s start with what NPS is all about.
What is New Pension Scheme (NPS)?
New Pension Scheme (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers/investors help save for their retirement through systematic savings during their working life. Earlier it was offered only to government employees. The scheme has extended to all, non-government employees or self employed. NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA).
Under the NPS, individual contributions/savings are pooled in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of government bonds, bills, corporate debentures and equities. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.
At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase an annuity from a PFRDA empanelled life insurance company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.
What is an Annuity?
An Annuity is a financial instrument which offers a monthly/quarterly/annual pension at a guaranteed rate for the period you choose for a given purchase price. There are different variants of annuities available in the market. For example, some variants provide guaranteed income for lifetime while others provide only for a fixed period. Some annuities provide income to the spouse of the annuity purchaser even after the purchaser’s death. An NPS subscriber may choose among the variety of annuities available to suit his/her requirements. Annuity market in India is still not well developed. However, you can expect greater innovation in the market by the time you retire, you can get much better and competitive annuity options (e.g. Annuities providing payouts that rise with inflation)
NPS is different from earlier pension system
Please note NPS is different from the earlier pension system where the amount received per month after retirement was fixed (based on your last salary) and increased periodically. The earlier system was a defined benefits scheme. In case of NPS, the size of corpus at the time of retirement depends on the return on your investments, which is not guaranteed. Additionally, the annuity income post retirement depends on the prevailing annuity rates at the time of purchase of annuity. Hence, monthly income is not guaranteed as in earlier pension plans.
Who can open an account?
Any resident or non-resident Indian aged 18 to 60 can open an NPS account.
How to open an NPS account?
To register for NPS, you need to submit registration form along with KYC (Know your customer) documents at any Point-of-presence (POP/POP-SP). Many banks/financial institutions provide this service. You can also enrol online through web-portals such as ICICI Direct. On opening the account, the investor/subscriber shall be allotted a unique Permanent Retirement Account Number (PRAN). This number remains with the subscriber throughout his/her lifetime.
Features of the Scheme:
- NPS account is completely portable. You need not open a new NPS account while switching jobs or relocating to a new city. Any person can open only 1 NPS account. A NPS account cannot be held jointly.
- NPS Account is structured into two tiers/ sub-accounts: Tier I and Tier II.
- A Tier I sub-account has limitations on withdrawal and is a retirement product in a true sense.
- A Tier II sub-account has no limitations on withdrawal. It is similar to a mutual fund. This type of account is allowed only if there is an active Tier I sub-account in name of the subscriber. Please note that the any tax incentives (applicable to NPS) are applicable only to investments in Tier I account.
- Any information shared henceforth in this post about an NPS account shall refer to a tier-I account, unless specifically mentioned.
- A subscriber need not make contribution every month. Minimum contribution per year: Rs 6,000 (Rs 500 per transaction). No upper limit on contribution
- A subscriber can make contributions to the NPS account till the age of 60
- A subscriber can choose from six pension fund manager to manage funds and even shift from one to another.
- Liquidity from the scheme: No partial withdrawals are allowed at the moment. A subscriber can only exit the scheme completely. The regulatory authority is considering allowing partial withdrawals subject to certain conditions.
- Exit from the Scheme:
- Upon attainment of 60 years: At least 40% of the accumulated wealth in the account needs to be utilized for purchase of annuity. Remaining 60% can be withdrawn as lump sum. The subscriber has an option to defer the withdrawal of lump sum amount till the age of 70. At the age of 70, any balance in the account will be paid out to investor as lump sum. There is no compulsion to purchase annuity in case the total accumulated wealth is less than Rs 2 lacs.
- Before attainment of 60 years: At least 80% of the accumulated wealth in the account needs to be utilized for purchase of annuity. The balance can be withdrawn as lump sum.
- Death of the subscriber: Entire accumulated wealth to be paid to the nominee/legal heir. No option for the purchase of annuity.
- Deferment of Annuity: A subscriber has an option an defer mandatory annuity purchase (as mentioned in (a) and (b)) by up to 3 years
- Applicable charges: The expense ratio is 0.01%, which makes NPS much cheaper than mutual funds. Additionally, there is a transaction charge of 0.25% or Rs 20, whichever is higher subject to a maximum of Rs 25,000, on every transaction/contribution.
- Investment guidelines: NPS offers investments in three asset classes: Equity (E Type), Government securities (G type) and investment grade credit-risk bearing debt or fixed income based instruments/corporate bonds (C type). For equity investments, the money is invested in index funds/exchange traded funds that replicate the portfolio of BSE Sensex or Nifty. Hence, one can expect the returns on the equity component to match returns on these aforementioned benchmark indices. There are two investment options available to the subscriber. However, under both the options, investment in equities (E type) is capped at 50%.
- Active choice investment: Investor can decide the allocation among the three classes as per his/her choice. Equity exposure is capped at 50%.
- Auto Choice investment/Life Cycle Fund: There is the default option and allocation among asset classes depends on the age of the investor. Under this option, investor does not decide the allocation. Till the age of 35, allocation of investment to equity (E type), corporate bonds (C type) and government securities (G type) is fixed at 50%, 30% and 20% respectively. After 35, allocation to equity will reduce by 2% and allocation to C type will reduce by 1% per year while the allocation to government securities will increase by 3% every year. This will continue till the investor age is 55. By the time, investor hits the age 55, allocation to E type, C type and G type would have become 10%, 10% and 80% respectively. The allocation to different asset classes is not modified subsequently.
How is the maturity amount taxed?
The NPS account matures when the subscriber turns 60. The contribution made by you or your employer, along with returns on your investments, gets accumulated in accumulated in your Tier I account. NPS is an EET (Exempt-Exempt-Taxable) product. At maturity (60 years), accumulated amount used to purchase annuity will not be taxed. However, the annuity income received (in the future years) is taxable in the hands on the investor as per investor’s income tax slab. Remaining corpus (left after purchase of annuity) is treated as income in the year of withdrawal and taxed at investor’s marginal tax rate.
In the event of death of the investor, the nominee can withdraw the entire accumulated corpus. The money, thus received, is tax-exempt in the hands of the nominee or legal heir.
Under the proposed direct taxes code, the income from the NPS is proposed to be made tax free i.e. NPS will become part of EEE regime. Such a move will make NPS very attractive. However, nothing is certain till such direct taxes code gets implemented. Basing your investment decision on expectation of such a move will be pure speculation.
There may be some tax relief on NPS withdrawal on maturity (for people subscribing to NPS offered by employer) on maturity under Section 10(10A) but that is subject to interpretation of the Act. Nothing can be said with certainty if the provisions of the said Section would be applicable to NPS.
Advantages:
- It is a very low cost financial product. Expense ratio is the lower than any mutual fund.
- Provides a balanced portfolio under auto choice option (life cycle fund). A subscribers’ portfolio is automatically adjusted towards debt as he/she nears retirement. A lot of us do not completely understand the risks involved in investing in equity markets. A small mistake towards retirement can jeopardise entire life’s savings. By automatically shifting the portfolio towards debt, NPS helps reduce such mistakes.
- Tax incentives:
- Investment up to Rs 1,50,000 into NPS in a financial year is eligible for deduction under Section 80CCD. Please note this is subject to the overall ceiling of Rs 1,50,000 for deduction under Section 80C.
- The latest budget has provided an additional exemption limit of up to Rs 50,000 per financial year for any investments into NPS under Section 80CCD (1B). This deduction is over and above the ceiling limit of Rs 1,50,000 provided under Section 80C.
- Contribution from the employer up to 10% of Basic Salary + Dearness Allowance are also eligible for deduction under Section 80CCD(2). There is no upper cap (in terms of amount) on this tax deduction. This deduction is over and above the ceiling limit of Rs 1,50,000 provided under Section 80C.However, this benefit is available to employees. Self-employed cannot avail this deduction.
- Annuity income in retirement can be extremely helpful. It is not easy to deploy assets to generate income. By the time people retire, they have groomed themselves to use monthly inflows (salary) to provide to provide for regular expenses. Post retirement, the monthly inflow will stop unless you have other regular sources of income such as house rent or interest income. This is where pension plans/annuity provides the maximum value.
Disadvantages:
- Entire corpus taxed on withdrawal (EET)
- Annuity payouts may not be able to protect you from inflation,
- Low returns on annuity: Annuity rates in India are low. For the sake of simplicity, the lower the annuity rates, the more you need to spend to purchase annuity to achieve same level of income. For example, to earn an annual income of Rs 1,00,000 for lifetime, at 8% rate of interest (annuity rate), the amount required for such annuity purchase will be Rs 1,250,000. The amount required will rise to Rs 2,000,000 if the annuity rate falls to 5%. However, you can expect to evolve by the time you retire. Hence, you can expect better annuity products (for example, annuity payouts that are linked to inflation etc) by the time you retire.
- Equity exposure, irrespective of the investment option chosen, is capped at 50%. Approach may not be optimal for young individuals.
- Limited liquidity: At the moment, partial/premature withdrawals are not allowed. One has to completely exit the scheme to get the money out. You can expect some relaxation in the future.
Should you invest?
There are a few aspects of NPS, which makes it different from other investment avenues such as mutual funds, EPF, PPF, ELSS (tax saving mutual funds): Let discuss those aspects.
- Annuities: That the NPS forces a subscriber to purchase an annuity for atleast 40% of the accumulated wealth is a good feature. For retirement planning, having a large corpus at the time of retirement is not sufficient. A retiree needs to have a good distribution strategy too i.e. how to use that corpus to generate regular income till the end of his/her life. Most of us do not acquire this skill during our professional life. We get used to getting salaries at the end of the month and using this to meet expenses. This is where an annuity fits well. A retiree gets a guaranteed monthly/ quarterly/annual cashflow after an annuity purchase. With a guaranteed income, he/she may be able to plan expenses better.
Some might argue that the annuity rates are low and annuities provide sub-optimal returns and are not tax friendly. Well, risk and reward go hand in hand. Since the returns are guaranteed, returns are bound to be lower. You can expect a lot of innovation and competition( in terms of rates and charges) in annuities market by the time you retire. Unless you have created an asset that can provide you regular income (stock/bond/mutual fund portfolio for dividend/interest, second house for regular rent), you can look at covering at least a part of retirement expenses through an annuity purchase at the time of retirement. However, no one stops you an annuity from your retirement corpus even if you don’t have an NPS account. Annuities are not exclusively available to NPS subscribers. You can simply liquidate a part of your assets at the time of retirement to purchase annuity.
- Risk/Return/Discipline: With respect to return/risk, you cannot expect NPS to provide better risk adjusted returns. A portfolio mix offered by NPS can easily be built using a mix equity and debt funds. A lower expense ratio will certainly add to NPS returns. However, being an index fund (for equity), it also stands to lose out on higher returns from active fund management. Please note that active fund management does not always lead to better returns. With respect to discipline, since NPS has provides limited liquidity and has minimum contribution requirement, it enforces discipline while building a retirement corpus. However, you can maintain similar discipline yourself.
- Tax Angle: One does enjoy tax benefits while investing into NPS. Some of the tax benefits are exclusive to NPS. However, since the entire corpus (considering annuity income is also taxed) is subject to tax at the maturity, the entire advantage of tax benefits is nullified. Some experts suggest that NPS will become part of EEE regime (maturity proceeds will also be tax free) eventually. An additional point to note; right now you might fall under a lower tax bracket. However, at maturity, since the corpus would have become much bigger, income that year might be taxed at the highest marginal rate. So, you may save 10% or 20% today but pay 30% later. For example, suppose you fall in 20% tax bracket, by investing Rs 100,000 in NPS, you save Rs 20,000 on tax this year. After 25 years (assuming 10% returns and 30% tax rate), your post-tax receipt will be Rs 7.58 lacs. However, on the other hand, if you had invested Rs 80,000 (after 20% tax) in a balanced fund, you would have received Rs 8.67 lacs (10%, zero long term capital gains tax). Please note that this tax equation may change completely if NPS maturity proceeds are indeed made tax free.
PersonalFinancePlan Take:
In spite of so many tax benefits being available to NPS, it is still not a good enough retirement product. Tax benefits shall not be sole criterion for choosing an investment product. There are products available which can provide better post tax returns than NPS. We recommend staying away from NPS till such time it becomes part of EEE regime.
Though we have recommended staying away, a lot of people might still get attracted to NPS because of tax benefits available exclusively to NPS. So if you still want to invest in NPS, invest to utilize tax benefits available exclusively to NPS i.e. fill your 80C exemption limit with 80C products other than NPS and invest in NPS If you still have money left to invest after this. Salaried employees can also invest through the employer to maximize tax benefits (under 80CCD(2)).
Additionally, since there is an equity component involved, we recommend you not to make lump sum investment in NPS. Rather, invest in NPS regularly (just like SIP in mutual funds). However, since there is a minimum charge of Rs 20 per transaction, you are advised not to make the size of each contribution too small otherwise transaction charges (minimum Rs 20) will eat up the benefit of lower expense ratio. Keep size of each contribution between Rs 5,000-10,000.
You can argue that, by not investing in NPS now and waiting for NPS to become an EEE product before investing, you would have forgone tax benefits (for multiple years) if NPS becomes an EEE product later. Well, that’s true. However, investing in a product (expecting a policy announcement) is tantamount to speculation and we do not recommend speculation to our readers.
Deepesh is Founder, PersonalFinancePlan
49 thoughts on “NPS is still not good enough, even with tax incentives”
Hi,
Thanks for a good primer on the nps regime. Had a couple of clarifications on the subject
1. You have mentioned that asset allocation in equity is an index fund. Now is that a mandatory/regulatory requirement and what are the debt instinstruments these pooled assets invest in. Can a high risk debt bond can be a part of investment
2. Generally, are the asset managers the same for mutual funds and nps for a particular fund house
3. How do fund houses/financial institutions benefit from nps considering abysmal expense ratios
4. What constitutes annuity packages at redemption. Can a purchase of real estate asset with a reverse mortgage get classified as annuity or are these pure pension plans
5. needed to understand tier 2 as an nps class since doesnt seem to add any value
6. In the event epf are given a mandate to manage portfolio through diversification which looks likely considering likelihood of allowing investments in infra bonds soon, what role would nps play for non govt employees
6. I still feel a cash surplus of 15000 annually makes it a viable option which if invested in a mid cap sip can yield sizeable returns considering the long tenure
Hi,
1. Yes, index fund is a mandatory requirement. Debt instruments have to be investment grade.
2. Fund managers can be same or different. The discretion belongs to the AMC. For equity part, since it is an index fund, there is not much that a fund manager can, in any case, bring to the table.
3. They get a higher rating in the league tables (for asset under management). This is similar to what investment banks do for PSU listings. Additionally, there can be other opportunities such as cross-selling of other investment products
4. An investor will be required to purchase annuity (atleast 40% of the accumulated corpus) from an empaneled insurance company. There is no other option. Reverse mortgage is not applicable in case of NPS.
5. Yes, no tax incentives either. Expense ratio will remain low though, so that is a benefit. There are no liquidity constraints, one can take money in and out anytime. There may be small disincentive with Tier II account though. Since equity allocation is capped at 50%, tax treatment may not be favorable. Please note that not everyone has information or easy access to investment products. Hence, the govt. merely wants an NPS subscriber to have that extra option of investment.
6. Irrespective of what EPFO does, NPS continues to play an important role. EPF is not structured to provide annuity income, while NPS is EPF provides guaranteed returns while NPS does not. The biggest impediment for NPS is the taxation on maturity. Whether EPFO is allowed to diversify into infra bonds or even equities, should not matter much.
The scheme is similar for govt and non-goverment employees.
7. I assume you meant an annual investment of Rs 15,000 for a 25-30 year period would provide sufficient returns to provide for retirement.Yes, SIP in a mutual fund (mid cap or large cap, I prefer large cap for retirement corpus) should give you a large corpus. Whether that corpus will be sufficient depends on your lifestyle. Please note NPS has two aspects. One is building a large enough retirement corpus. Second is the annuity part. Retirement corpus can be built through a SIP but most of us have not been groomed to generate regular income out of our assets. We rely on salaries to meet monthly expenses. Through mandatory purchase of annuity, a regular inflow is ensured. I am not saying that this can not be done without NPS. You can purchase annuity on own by liquidating your mutual fund investments or go for other monthly income plans. However, most of us don’t have financial awareness to make such decisions. That’s when we fall prey to gullible financial intermediaries.
Thanks for your response had actually referred to the ability to generate additional cash surplus of 15000 based on ones marginal tax rate by investing in NPS. Just one more clarity in terms of investing in NPS is it like an Insurance premium that you lock inself for an amount during tenure or is it solely my discretion (i.e. pay ~50,000 year 1,3,5,7 and not 2,4,6,8)
For you second question,there is such restriction. Subject to a minimum limit of Rs 6000 per annum, the amount invested in an year is at the sole discretion of the investor. This is unlike insurance premium, which remain constant during the term of the policy.
For your first question, it is a mathematical construct, if the tax rate and the return assumed is same, it does not matter whether you are taxed upfront or at maturity. Hence, if midcap fund performs as well or as badly as NPS, it does matter whether you pay tax now or you pay it later. I think the implicit assumption is that the midcap fund will outperform NPS. Hope I got your question right this time around.
What is the death benefit after the annuity starts. meaning
after Age 60 the annuity will start. and if the person dies at the age of 65 ? What will happen to the money ?
That depends on terms and conditions of the annuity product that you would have purchased using NPS proceeds. NPS would have nothing to do with it. Typically, under annuity products, annuity is continued to your partner or a lumpsum amount is paid to the nominee. So, it depends on terms and conditions of the annuity product.
Do we expect any guarantee returns? If yes, what is the minimum % ?
Naveen, there is no return guarantee. Hence, there is no minimum return. Return depends on performance of the underlying securities that the fund manager has invested in.
Sir, thanks for bringing out finer points of NPS.
Although I have few queries mainly due to the fact that probably I am unable understand clearly
1)Regarding Tax angle:
Suppose an self-employed individual who falls in highest tax bracket 30%
opts to invest in NPS Tier 1, what is the minimum amount he requires to invest
to obtain maximum tax benefit. Is it 10% of Gross income or 50000/- or one lakh, or what exactly?
2)At maturity 40% would be for annuity, while 60% can be withdrawn and will be taxed. Can we defer and withdraw it in installments over years as per requirement to reduce tax burden on each withdrawal, if yes is there a limit as to over how many years we can withdraw?
3) Also because after retirement there would be no other source of income, the amount may or may not fall in highest tax slab, and may even fall in lower slab. And is it not fair to assume that tax slabs would also move up over years?
Thanks Vikash.
1. For self-employed, there is no benefit under 80CCD(2). Benefit under Section 80 CCD(2) is available only to salaried professionals. Here is my revised take on NPS taxation. http://www.personalfinanceplan.in/opinion/nps-tax-benefits-and-tax-treatment-on-maturity/
For self employed, the maximum tax benefit under Section 80CCD(1) is limited to 10% of gross income.This comes under overall 80C basket. Additionally, you can put Rs 50,000 under Section 80 CCD(1B). This is irrespective of what you have claimed under 80CCD(1).
Hence, you can get maximum tax benefit of 10% of gross income + 50,000. Do note you can deposit as much as you want. Tax benefit will be limited as discussed before. Technically, the maximum tax benefit can go up to Rs 2 lacs. Depends on your gross income.
2. Yes, you can withdraw it in 10 annual installments till the age of 70 years. This is a very recent development by PFRDA. The notification was issued on October 20, 2015. You can read the notification here. http://pfrda.org.in//MyAuth/Admin/showimg.cshtml?ID=785
Yes, that can help reduce tax burden in some cases. You can withdraw in a way that you do not attract heavy taxation. With this, even my commentary on NPS will require a revisit.
I had written a post on revised NPS withdrawal and exit guidelines. http://www.personalfinanceplan.in/opinion/revised-exit-and-withdrawal-rules-for-nps/
However, withdrawal of lump sum withdrawal in installment till the age of 70 is not covered there.
3. This is speculation. Don’t know how tax structure will be like when you retire.
I get your point. You are getting taxed at 30%. You think since you can withdraw in 10 annual installments, you will withdraw only enough (after retirement) so as not to attract taxation at the highest rate. Please note you will have pension income from NPS ( you have mentioned no source of income). But yes, I agree with your assessment. There is value in your argument.
Thanks for pointing out.
Will cover this aspect in one of my posts soon.
Thanks Sir, it clarified my doubts.
Vikash,
I had missed out on a technicality in my previous response.
Have updated the comment.
Hi Sir,
I am in tax bracket of 20%.
I am having savings of 1,20,000 under 80C
My taxable income was 8,50,000 after 80 C deduction and HRA.
I want to reduce my tax,so i want to invest amount in NPS.
Can i know how much amount can i invest in NPS.
My current tax amount is 99000.
I want to reduce this amount,kinldy provide your suggestions.
Dear Latha,
If you have used your 80C investment basket completely (you have invested Rs 1.5 lacs in 80C product, then you can invest up to Rs 50,000 in NPS for maximum tax benefit.
You can invest more in NPS but the tax benefit will be limited to Rs Rs 50,000.
Go through this post to understand how much you can invest in NPS.
http://www.personalfinanceplan.in/opinion/common-doubts-about-nps/
About other tax saving avenues, there are number of posts on he website. I am listing out a few popular posts.
http://www.personalfinanceplan.in/taxes/how-to-save-income-tax-part-ii-tax-benefits-of-health-insurance/
http://www.personalfinanceplan.in/taxes/how-to-save-income-tax-part-i-section-80c/
http://www.personalfinanceplan.in/taxes/how-to-save-income-tax-part-i-tax-exempt-allowances/
http://www.personalfinanceplan.in/opinion/15-lesser-known-income-tax-deductions/
Hi Deepesh,
I am a 30year old self employed professional.
I will start NPS for an amount of 50,000. I have decided to select Active Choice…with max 50% in equities and continue it till a certain age..But can u please help me in deciding the allocation percentage wrt to G & C sector..? I dont hav much idea in this regard.
Secondly, can i change/add/delete any nominee name or edit percentage allocation later on ? Wat is the system ?
Dear Biswadeep,
No formula to arrive at the ratio. I would probably have 45% in Govt. Securities and 5% in corporate debt. Or I would have the entire 50% in Government debt You have to take a call.
Yes,you can change nomination later. This is more of an operational aspect. This is the link to the form.
https://npscra.nsdl.co.in/download/government-sector/corporate/forms/Form-for-correctio-or-change-in-Subscribers-Master-CS-S2.pdf
Thanx for ur suggestions.
1)if i submit the initial NPS form in one Pop-sp this FY and subsequently for next FY can i go to any other Pop-SP of my choice & submit my cheque or has it got to be only at the same POP-sp? Do i have to submit any documents…?
Secondly, for subsequent years can i do online submission of the amount or is there any facility of auto debit for NPS ? Or is it only via cheque?
Entirely your choice.
Visit the nearest POP-SP or you can do online transfer.
There must be ECS facility. Check with your POP.
There might an option for auto-debit even on the online interface.
These are operational aspects. Since I have not opened any NPS account, I am a bit challenged on operational aspects.
Thank u Deepesh once again…
Hi Deepesh,
I am currently falling in 30 percent tax bracket. Hence, evaluating nps option for tax saving and also for retirement planning.
I have a quick question with regards to nps contributions.
Is it possible to make nps contributions through credit card online?
Thx
Hi Venki,
You cannot make NPS contributions through credit card.
Just to clarify, you can make online contributions but through net banking.
Sir
One can make payment through credit cards
I have done for me and my wife
Yes, you can do so. Initially, I was under the impression that you can’t do it but found out later frm e-NPS interface.
Thanks for pointing out
If I invest in the name home maker cum non working spouse, then that portion will be eligible for tax or not?
If APY investment is also part of 80ccd or not?
For some of the investments, you can even invest in the name of your spouse. Depends on the kind of investment.
Not sure what APY means?
Guess APY means Atal Pension Yojna 🙂
Hi Deepesh,
Thanks for all the posts and clarification. I had following two comments:
1. Why is purchasing annuity seen as a negative thing with respect to NPS? Let’s for a moment forget about NPS. Using whatever means of savings/building corpus for retirement (EPF, PPF, etc.), what option does subscriber have to use that money after maturity/retirement? Either he/she has to go for annuity, or fixed deposit or Post office MIS, or similar debt instruments which pay interest. Usually, in all these cases also, the interest payout is around 7-9% at max (currently) and all of this interest is fully taxable. That’s the same case with NPS isn’t it? Govt is insisting on using 40% to buy annuity, and annuity payout gets taxed; at-least out of remaining 60%, 40% is allowed to be withdrawn tax free!
Are there better ways to utilize the money to generate income? For Ex: when PPF matures and proceeds are tax free, how to use that money in best way to generate income?
2. As long as annuity can pay 7-9% I think there is nothing wrong in it. I do understand some LIC annuities pay only 6% which is a concern, however not sure why payout should be so less? If one particular debt instrument can pay 8-9% I see no reason, why eventually even annuity plans cannot pay the same amount. Maybe it’s just a matter of annuity market evolving and becoming more competitive! Further who knows, are 20 years, there may be annuities that may put 10-20% in equity to get better returns on the corpus or some newer models that can help generate more returns 🙂
Just my thoughts, I feel after 2016 budget announcements, NPS is a decent product (specially for folks in 30% bracket). Would like to know your thoughts on why you may still consider it an average/bad product
Thanks!
Hello Mr Deepesh, could you please share your thoughts on the above post? Thanks!
Sorry, didn’t get your question. Guess you forgot to attach a link.
Hi Deepesh Sir
Can i start SIP in NPS? i have invested 50000 in March 2016 and want to invest further in SIP mode, is this possible? if yes, how ?
Hi Deepak,
I am not an NPS subscriber. Hence, slightly challenged on operational front.
However, I have not seen (or am aware of) any mechanism through which you can start SIP in NPS.
So, you will have to do invest manually by visiting POS or through internet.
One can pay through credit card also
hi deepesh sir,
my company doest not have NPS in our salary structure, Im falling in 30 % tax bracket so want to save tax. Does nps is advisable option to so?
i have one query that if im doing NPS though employer for which my 10 % of basic salary need to be invested, im i supoose to pay those 10% or employer will pay half share & i have to pay half? for ex. suppose the amount is 5000 for monthly NPS, does the full amount will be deducted from my salary or i have to pay Rs.2500 & rest will be paid by employer.
2nd query my employer has informed me that if i invested thought employer (assuming im paying both the part )im only eligible for tax saving of emplyers part under 80 CCD-2. my contribution of payments will be part of CCd-1 thus wont get tax benefit as im already exauted my 80 C becouse of hime loan.
so iw vl get only tax benefit of half of the amount. for ex. 5000 is NPS so im only applicable for tax benefit of rs. 30000 not rs.60000. is it true?
please guide me on this.
You need to take a call yourself. I have written may posts on the topics. From the taxation perspective, it makes sense for someone in 30% tax bracket. However, you must look at NPS structure and rules if its suits you.
2nd query: Combined benefit for Section 80CCD(1), Section 80CCC and Section 80C are capped at Rs 1.5 lacs. Can’t do anything about it. But you can use the same contribution under Section 80CCD(1b).
I didn’t get your first and third queries. Kindly rephrase the question.
thank you deepesh sir, my first question is like in EPF the employer part & employee part is noways parts of CTC of employee.
does similar thing is there in NPS also? means as a employee i have to pay the 10% of the basic salary to NPS or employer shares the the half of amount?
hope you get the question.
thank you.
Employer contribution comes under Section 80CCD(2). Employer contribution up to 10% is exempt from tax.
Yes, it is just like EPF.
Your contribution comes under Section 80CCD(1) and 80CCD(1B).
Hi Deepesh, very interesting post with good illustrations.
You have covered the aspects of taxes on the withdrawal and differed withdrawal to reduce tax.
If I decides to invest 100% in annuity and allow the corpus to be passed on to the nominee(tax free) will it make sense, considering tax angle.
This is considering my view – NPS is only for annuity and we should plan other investments to take care of lump sum needs after retirement.Please advise.
Dear Ilango,
Your question is not very clear.
Annuity income is taxed in the hands of the recipient (whether it is you or your nominee).
Annuity is not exclusive to annuity. You can accumulate retirement corpus on your own and purchase annuity at the time of your retirement, if there is need.
http://www.personalfinanceplan.in/insurance/pfp-primer-pension-plans-from-insurance-companies/
I want to know if I invest in nps in any bank and I am not a govt employee still then the bank will contribute 10% as it is done with the govt employee (employer+employee).
No, bank wouldn’t contribute on your behalf. Only employer does.
hello sir,
i just want to invest in nps.someone told that it is tax payable after retirement.can you please clearify.
have confusion about tier 1 and tier 2 too??
plz suggest
Dear Saurav,
Suggest you go through following posts.
http://www.personalfinanceplan.in/opinion/nps-tax-benefits-and-tax-treatment-at-maturity-revised/
http://www.personalfinanceplan.in/opinion/should-you-invest-in-nps-tier-ii-account/
For Tier I, has the minimum contribution been lowered to Rs 1,000 per year (from the earlier Rs. 6,000/-)? Please confirm.
yes
NPS is really benefited, if you compare SIP with NPS then in my opinion SIP is better option than NPS also at the time of retirement NPS amount we can withdrawn in installment. Tax also kill at the time of NPS withdrawan. Means we have to save tax and at the time of withdrawal please pay tax.
Not at all advisable NPS scheme.
Hello Sir,
It’s good explanation regarding NPS, which cleared most of my doubts regarding this scheme. Myself working in Karnataka State PSU and I will come under NPS Tier-I State Government Scheme, under which 10% of my salary + equal contribution from employer is being credited to my NPS account. But, the employer contribution (10% of my salary) is not included in Total Gross salary of the FY either in Form-16 provided or even in 26AS of my Income tax account. My doubt is that, in my case can I claim Tax rebate for employer contribution under section 80CCD(2).
Thanks in advance
Hi Raghunanda,
In that case, you have already received the tax benefit under 80CCD(2).
You can claim the benefit twice.
Thank you
I need to know more about NPS but i dont want my email address to be published anywhere.
There is no need to put your e-mail id. In any case, your e-mail id is not public.
There are many posts on this site about NPS. Suggest you go through those.
Suggest you start with this one.
https://www.personalfinanceplan.in/nps-tax-benefits-and-tax-treatment-at-maturity-revised/