“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”
- Denis Healey
Yes, saving tax is very important….but, it needs to be done in a proper way. This is where the New Pension Scheme, popularly known as NPS, can help you. Life expectancy is rising in India. Our citizens are enjoying, long life. Living till 80 or more, is no big deal. This means a long life after retirement. Want to save for retirement, but are not confident making investment decisions? NPS makes sure you invest systematically across your working life, to enjoy a great retirement. Investing for retirement is a long term commitment.
You’re talking 25 to 30 years. If you are not familiar with asset allocation, (how much money to put in debt and how much in equity) and at what age to do so, simply invest in NPS. You also get income tax benefits on your investment in the NPS.
Over 87% of Indians, either don’t save for retirement or they don’t save enough for retirement. IndianMoney.com believes that the dream of developed India is possible only when we achieve 100% financial literacy. To avail free financial advice/education from IndianMoney.com, all you need to do is, just leave a missed call on IndianMoney.com financial education helpline 02261816111 or just post a request on IndianMoney.com website.
New Pension Scheme popularly known as NPS, is a voluntary pension scheme, which is regulated by PFRDA (Pension Fund Regulatory and Development Authority). You can invest in the NPS, if you are between 18 and 60 years, on the date of submission of your application. Under NPS, you have Tier-I and Tier-II accounts. You invest money towards the NPS, in a Tier-I account. You cannot withdraw this money, till retirement. (Age of 60). You also have a voluntary withdrawal account (Tier- II), which you open, only if you have a Tier-I account. You can withdraw money from your Tier-II account, as per your needs.
Your money is invested in the NPS under:
If you choose this option, your money is invested in these 3 asset classes:
Asset Class E: A maximum of 50% of your investment is in equity, under asset class E.
Asset Class C: Your money is invested in corporate bonds, both PSU bonds and private company bonds.
Asset Class G: Your money is invested in Government Securities.
If you are not a confident investor, or do not have the knowledge to keep track of your investments, choose the auto choice option. This is an automatic management of your investment in the NPS, based on your age. The proportion of your investment in each of the asset classes, Asset Class E, Asset Class C and Asset Class G, is adjusted based on your age. The maximum amount invested in equity, is 50% of your investment.
The Finance Minister Arun Jaitley, in the Union Budget 2015-16, introduced an additional income tax deduction, for the NPS. You get a tax deduction of INR 50,000, under Section 80CCD(1b) of the income tax act, on your voluntary contribution to the NPS. This deduction is over and above the tax deduction of INR 1.5 Lakhs, you get under Section 80C.
Section 80C + Section 80CCD(1b) = INR 2 Lakhs.
If your employer contributes, up to 10% of your (basic salary + dearness allowance), towards the NPS scheme in your (employee’s) name, you would get a tax deduction under Section 80CCD(2).
Now comes the really good part. This deduction is over and above the tax deduction of INR 1.5 Lakhs, you get under Section 80C. It is also above the tax deduction of INR 50,000, you get under Section 80 CCD(1b). This deduction is available only for salaried employees. Self employed, do not get this tax deduction.
The Union Budget 2016, has real good news for you. You can withdraw your NPS corpus, at maturity. Out of this (accumulated NPS corpus), 40% is tax free. Earlier the entire NPS Corpus withdrawn at maturity, was taxed. You can withdraw 60% of your NPS Corpus, as a lump sum at maturity (60 years).
With the remaining 40% of your NPS Corpus, you have to compulsorily purchase an immediate annuity plan. The annuity payments you receive after retirement, are taxed. If you withdraw from the NPS, before 60 years, 80% of the NPS corpus, is used to compulsorily purchase an annuity plan. You get only 20% of your NPS Corpus.
NPS has the potential to be a hit with the youth of our country. Your money is invested in equity, which is an excellent investment to save for retirement. You get returns above inflation. Income tax benefits further sweeten the investment.
So…Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.