National Pension Scheme- Few Noteworthy Points

NPS is a defined contribution based pension scheme promoted by Government of India. The scheme is regulated by Pension Fund Regulatory & Development Authority (PFRDA).

Under the NPS, you can regularly invest your money into your pension account and have an option of taking a part of the corpus as lump sum amount and the balance in form of fixed monthly income. NPS Calculator does help to understand the corpus which can be accumulated at the time of maturity and the approximate amount of monthly pension based on a particular level of investment over a horizon period. The calculator can be searched over Google for usage.

Objective: Assured monthly income to ensure dignified life in old age.

Advantages

The Scheme offers a wide range of features making it a unique investment option. Few of them are –

- Portable across jobs and locations.

- Online access to investment.

- Least cost investment option.

Disadvantages

NPS does involve quite a long lock-in period, hence might not be attractive. Further the NPS rules on annuity is worrisome. The entire 60% of the corpus that can be withdrawn on maturity is tax free. However, the remaining 40% has to be compulsorily put into an annuity to earn a pension that is fully taxed as income. This effectively means an investor does not save tax but only defers it.

Therefore tax on annuity is not reasonable because the pension received is a mix of the principal and investment returns.

Being taxed on investment returns is acceptable, but the tax on the principal portion is not something which would be acceptable. At least, principal component can be exempt from tax.

Few points to consider before investing

1.    Best performing NPS schemes can be searched over internet or with the help of the financial advisor and that can help in choosing the scheme as per the risk apetite.

2.    Both the tax benefits u/s 80CCD (1B) and 80CCD (2) are over and above 1.5 lakhs limit u/s 80C and can be availed of at the same time.

3.    Employees who already have NPS registration in their individual name and PRAN and wish to migrate into Company NPS is possible by following the necessary laid down procedures.

4.    As per the new guidelines by PFRDA, it is mandatory to attach the Cancelled Cheque with every Account Opening and Inter-sector Shifting request. 

5.    By voluntarily enrolling in Corporate NPS, one can exercise your choice of Pension Fund Manager (PFM), investment fund options in asset classes i.e. Active Choice or Auto Choice and Annuity Service Provider.

6.    Transfer from EPF to NPS is also now possible. It is to be noted that the same is not taxable transaction in the eyes of law.

7.    The Pension Fund Regulatory and Development Authority (PFRDA) has recently proposed to provide additional option to exit from NPS through an online process for e-NPS subscribers. Currently there is no online facility available, however the manual or offline process does exist for exit. This will further provide flexibility in operation of the account.

8.    Investment in Tier-I account of National Pension System (NPS) via your employer allows you to claim a deduction from your gross total income under the Income-tax Act even under the new lower tax regime as well. The deduction can be claimed under section 80CCD (2). It should be noted that this is possible only when employer is making payment on behalf of the employee to the NPS account. If an  employer does not offer the NPS benefit, then one will not be able to claim the deduction under 80CCD (2).Further it should be taken into account that if an employer contributes any amount to the employee's NPS account, the contribution is likely to be part of the employee's CTC and this may lead to a reduction in the in-hand salary every month for the employee.

        There is no restriction on the amount that can be contributed by an employer to              the Tier-I NPS account of an employee. However, the maximum deduction that is         allowed under the current income tax law cannot exceed more than 10 per cent of          the employee's salary." Salary here includes basic and dearness allowance.

9.    Making changes in the asset mix is very important at regular intervals since the economic scenario does change and hence its advisable to change the mix in order to optimize the return. For example, when the Sensex is corrected substantially, it would be advisable to invest more into equities and vice versa.

10. Investors can choose from three lifecycle funds—aggressive, moderate and   conservative. The lifecycle funds of NPS are the means by which rebalancing  of  the portfolio is possible can happen. Investors can invest as per their risk       apetite and earn accordingly.

Way forward 

Overall, this scheme has many advantages to ponder upon and can be a good source of retirement planning. In case the Government makes annuity tax free, it will be a great incentive for people to have their focus on this scheme. NPS subscriber base is increasing day by day. This highlights the popularity of this retirement scheme. Further NPS grievances can also be raised through online mode. This ensures timely response/ redressal to any grievances raised, which helps in building faith and ensuring transparency.

Disclaimer – NPS website has been referred while preparing this article. This article is meant for understanding purposes only and in no way be deemed to be an advice or solicit any marketing whatsoever. Any decisions based on this article would not held me liable for any action whatsoever. Please get in touch with your auditor/legal consultant to understand the impact on your industry. Thanks!