Get Tax benefits on National Pension Scheme (NPS)

What is National Pension Scheme (NPS)

It is a pension fund  meant for corporate employees where the corporate entities contribute on behalf of their employee. The main aim is to have a pension for the employees after their retirement. This leads to a robust retirement plan and thus a security of income at the old age as per market driven returns.

Returns/ Tax Benefits

The Scheme does not guarantee or specify any return on the investments. The returns are market driven and are generated as per portfolio selection of an account holder. Since the fund invests in asset classes like Government Securities, Bonds and Equities, it gives returns just like any other mutual fund scheme. The advantage here is that one can choose his /her own portfolio bifurcation as per his risk perception and still enjoy at least fund management fees.

Additionally, one can also avail a benefit of tax deduction under Section 80CCD (1B) for Rs. 50000 invested in a year over and above Rs. 1.50 lacs in section 80C. This means a person covered under a tax bracket of 30% will save Rs.15,450 towards tax payments.

NPS is taxable as per EET(exempt-exempt-tax) system. As per EET, the contributions are eligible for tax deduction, returns are tax exempt however withdrawals are taxable. I feel this is right for any pension fund as they are not meant to be withdrawn but for a regular income.

Fund Management

NPS allows flexibility to choose between active choice and auto choice.In active choice, the subscriber may decide on the percentage of investment between Corporate, equity and debt, subject to maximum investment in equity at 50%.

Auto choice or Life stage fund is mainly meant for investors who do not have the fair knowledge. This Auto choice works as per the age of account holder. In case where the age of account holder is less than 35 years, then equity is given maximum priority to form the portfolio and lesser contribution of debt scheme and followed by government bonds. When the account holder crosses the age of 35 years, the proportion in government bonds will increase resulting in a fall of proportion in equity and debt. by the time the account holder will reach an age of 60 years, the proportion of investment will be 80% ending up with 80%. This formula creates the right balance between risk and return according to the age of the account holder.

The 50% proportion allowed for equity is invested in Nifty stocks in exactly the similar weight age which is like investing Index funds which exactly replicate the return of Nifty. This although cap the potential return but restricts risks with a proper diversification between different sectors. Further, one investing on regular monthly basis will get further diversification by investment at different time and different moods of the markets

Flexibility to choose between fund managers. As of now there are 8 fund managers, out of which one fund manager needs to be selected compulsorily.

Extremely Low Fund Management Fees

Since it has already built a huge corpus, the leading fund management companies bid their lowest rates. The fund management fees are as low as 0.0009% per annum as compared to 0.5% to 2% in a normal mutual fund. You can also choose or switch your fund manager once a year.These fund managers are:

1. HDFC Pension Management Company Limited
2. ICICI Pension Fund Management Company Limited
3. Kotak Mahindra Pension Fund Limited
4. LIC Pension Fund Limited
5. Reliance Capital Pension Fund Limited
6. SBI Pension Funds Private Limited
7. UTI Retirement Solutions Limited

Other Features

• Regulated by PFRDA, a regulator for the pension sector in India
• Transparency in investment norms, constant monitoring
• Regular performance review of Fund Managers.

Eligibility

Anyone between the age of 18 years and 60 years can open this account. Even  NRIs are also allowed to open an account with the National Pension Scheme.

Enrolment

For getting enrolled for NPS, a Composite Registration Form (UOS-S1) is required to be submitted at Point of Presence (POP) or Point of Presence – Service Provider -Authorized branches of POP for NPS (POP-SP) near to you. This list of POP Service Providers is readily available at PFRDA website www.pfrda.org.in. Once enrolled, you will receive a welcome kit containing a PRAN card which you need to keep for all future references.

Deposits

There is a minimum contribution of Rs.6000 per annum however no limit on the maximum contribution.this amount may be deposited in one or more transactions. The maximum cash deposit allowed in the scheme stands at Rs. 25,000 per transaction. There should be a minimum one transaction in the account every year. In case of failure to make any deposit in the entire year, a penalty of Rs. 100 per year will be levied.

Operations

NPS accounts are completely portable and may be operated from anywhere in the country. One can also track all the transactions online through the CRA system. The nomination facility is available with the NPS account  as such a nominee is entitled to get an accrued amount after the death of the account holder. A transaction charge to the extent of Rs. 20 or 0.25% (whichever is higher) is levied on each contribution. So investing a sum of Rs. 500 every month may not be a good idea since you will pay Rs 20 each time, that comes to 4% of the amount.

So in all, along with a lucrative tax deduction, I feel it will suddenly catch an eye of investors. The scheme is an ideal fit for the people who are looking for a retirement plan and are investing mutual funds or fixed deposits for the same. Not only, here they will bear a lower cost but also avail the tax benefit while contributing and maintaining this fund.