Articles

Before you pour money into the New Pension System, know the tax benefits offered by the

scheme and the tax treatment of the income.

1. Tax benefits
   

There are three ways to claim tax deduction by investing in the NPS. Firstly, contributions of up

to Rs 1.5 lakh a year are eligible for tax deduction. If your employer has introduced NPS or you

invest in the NPS on your own, the amount you contribute to the scheme will be eligible for

deduction under Sec 80CCD(1). This deduction comes under the overall deduction available

under Sec 80CCE. Secondly, a further deduction is available under Sec 80CCD(2). Under this,

if your employer puts up to 10 per cent of your basic salary in the NPS, that amount will be

eligible for tax deduction. If your basic salary is Rs 3 lakh a year (Rs 25,000 per month), you

can avail an additional deduction of Rs 30,000 (10 per cent of Rs 3 lakh). From this year,

another additional deduction of up to Rs 50,000 is available under the new Sec 80CCD(1b).

Any taxpayer who invests up to Rs 50,000 in the NPS can avail of this deduction, over and

above the Rs 1.5 lakh saved under Section 80C.

2. Annuitisation on maturity

NPS investments mature when the investor turns 60. If the corpus is less than Rs 2 lakh, the entire sum can be withdrawn. If it is more, the

subscriber must put at least 40 per cent of the corpus into an annuity to get a monthly pension. The investor can choose any annuity option as

well as the annuity provider. Till recently, the annuity had to be purchased as soon as the subscriber turned 60. But under the new rules, the

investor can wait for up to three years to withdraw the corpus. This flexibility is important because if the investor has some portion of his corpus

in stocks and the markets are down when he turns 60, he has the option to wait till the markets recover.

3. Taxation of corpus

The maturity corpus is tax free for government employees but private sector subscribers have to pay some tax. If the individual has not received

gratuity, up to 50 per cent of the total corpus received as commuted pension will be tax free. But if he has received gratuity, only 33 per cent of

the corpus will be tax free. If your NPS corpus is Rs 1 crore, 40 per cent of this (or Rs 40 lakh) will go into buying an annuity. If you do not get

gratuity, 50 per cent of the corpus (or Rs 50 lakh) will be tax free. The remaining Rs 10 lakh will be taxed as income at the normal rate

applicable to you. Savvy investors can minimise the tax by staggering the withdrawals over 2-3 years.

4. Withdrawal rules

NPS is a pension product and therefore, premature withdrawals before 60 were not allowed. Under the new rules, a subscriber who has

contributed for at least 10 years will be allowed to withdraw up to 25 per cent of the contribution for specific purposes, including children’s

higher education or marriage, construction or purchase of first house and medical treatment of self, spouse, children or dependent parents.

The medical treatment is only for 13 critical illnesses and life threatening injuries sustained in an accident. An investor can withdraw three times

during his tenure in the scheme but there should be a gap of at least five years between each withdrawal. However, this gap will not apply in

case the withdrawal is for a medical treatment. Also, the curbs on withdrawals are only for tier I accounts. Investments in a tier II account, which

can be opened only if you have a tier I account, can be withdrawn any time.

5. Investment rules

Unlike the PPF, there is no ceiling on the amount one can invest in the NPS. However, there is a minimum Rs 6,000 that a subscriber must

contribute in a year. There is also a 50 per cent ceiling on the allocation to equities. Till recently, the equity portion of NPS funds for private

sector employees was invested in Nifty stocks in the same proportion as their weight in the index. But now fund managers have been allowed

to invest in a wider universe of stocks. They are also no longer required to mirror the index but are free to invest as per their reading of a

stock’s potential. Investors can choose from any of the seven pension fund managers but can switch only once in a year.