In the Budget 2016, tax structure has been made favorable for long-term investing. The longer duration of the national pension system (NPS) combined with tax benefits makes it an attractive avenue to include in your investment portfolio.
With the commencement of the new financial year, many individuals seek new investment options that help them save taxes. Several choices are available for investing your funds and availing of tax benefits; however, tax planning is complicated in nature. It is very important for individuals to completely understand the tax considerations before making any investment decision.
Considering the fact that India offers a favorable long-term investment environment, opting for opening an account in the new national pension system is advisable. The NPS offers dual benefits of saving taxes while helping to build a good corpus for the future. This scheme offers a systematic way towards wealth creation and is promoted and regulated by the government authorities. Moreover, it is versatile in allowing investment in different asset classes, such as government securities, stocks, and corporate bonds.
Gaining an understanding of the NPS
The national pension system was launched in 2009 but gained popularity last year when additional tax benefit under section 80C was made available for investments made in it. The benefits include an additional tax deduction of INR 50,000 u/s 80CCD (1B) for individual model subscribers. Employees may avail of tax benefits for an amount of up to 10% of their basic salary plus dearness allowance u/s 80CCD (2) under the corporate model.
Applying for this pension plan
Applicants may easily apply online because the entire procedure is quick and hassle-free. Subscribers open an account with the Central Recordkeeping Agency (CRA) and receive a unique PRAN (Permanent Retirement Account Number). PRAN is used to make all contributions, withdrawals, and for other purposes related to this pension scheme.
Contributions and withdrawals
The national pension system is a defined contribution plan and does not offer guaranteed returns. Based on the performance of the different asset classes, subscribers may earn good returns on their investments.
A minimum amount of INR 6,000 per year must be contributed to a Tier I account. This contribution continues until the individual reaches 60 years. This is a non-withdrawal account and no money may be withdrawn from the Tier I NPS account until maturity. At the time of maturity, subscribers may withdraw a maximum of 60% of the accumulated corpus. The balance is converted to an annuity-based pension plan, which provides a monthly income to investors.
When the NPS was launched, it was an EET (Exempt-Exempt-Taxable) plan. However, recently, it has been modified as an EEE (Exempt-Exempt-Exempt) retirement scheme bringing it to closer with other pension plans, such as Employee Provident Fund and Public Provident Fund.
Subscribers may actively participate in investing their contributions under different asset classes. However, the maximum amount that may be invested in equities is limited to 50% of the contribution. Alternatively, investors may opt for the default choice so that the chosen fund manager allocates the amounts under various asset classes. As the person ages, the investments in stocks and corporate bonds will be decreased to provide stability through investment in government securities.
