Last month, the Pension Fund Regulatory and Development Authority (PFRDA) increased the maximum age of joining the National Pension Scheme (NPS)-private sector from 60 years to 65 years. This move, now allowing a larger segment of senior citizens to adequately plan for retirement, matters because research shows that by 2050, 20% of our population will be above 60. Moreover, coming on the heels of the tax incentives announced in Budget 2017, it is yet another step by the pension regulator to make NPS more attractive for investors.
Yes, the NPS does offer several tax benefits, which unfortunately gets sidelined in the face of the fact that only 40% of the NPS corpus is tax free on maturity, unlike other retirement options like EPF and PPF, which are fully exempt. Here are four advantages that you need to know about, apart from the fact that NPS returns are likely to beat those from the EPF:
Tax benefits beyond Section 80C
Under Sections 80C, 80CC and 80CCC of the Income-Tax Act, investments up to Rs 1.5 lakh are deducted from the taxable income of salaried as well as self-employed individuals. Those investing in NPS can claim an additional deduction of Rs 50,000 under Sec 80CCD(1b).
Moreover, under Section 80CCD(2), any NPS contribution made by the Central Government or any other corporate employer on your behalf is eligible for deduction up to 10% of your basic salary plus dearness allowance, irrespective of the amount.
Ability to manage taxation better
According to Hemant G. Contractor, a well-structured withdrawal strategy coupled with prudent tax planning can effectively reduce your NPS tax liability to zero. "Last year, 40% of the maturity corpus was made tax free. Another 40% of the corpus escapes tax when put in an annuity to earn a monthly pension. However, 20% of the corpus is still subject to tax at maturity, though there are tax-saving options available to the investor," he said to The Economic Times Wealth. According to Contractor, if the balance 20% corpus is also put in the annuity (along with the mandatory 40%), it will not be taxed. For the record, an annuity is a contract aimed at generating steady income during retirement, in which you make a lump sum payment or a series of payments and, in return, receive regular disbursements.
Tax-free partial withdrawals
Though the NPS has a locking period of 60 years-with the option of postponing lumpsum withdrawal till 70 years-you are allowed to make up to 3 premature withdrawals in between. You can withdraw up to 25% of your NPS contribution for medical emergencies and life events like marriage, education etc. These withdrawals are now tax-free and, according to media reports, will come into effect from assessment year 2018-2019.
According to Contractor, another tax friendly feature is that GST is waived on annuities purchased with the NPS corpus. Normally, there is 1.8% GST payable on the value of the annuity, but NPS investors are exempt.
Those new to the workforce need to understand that NPS was started in 2004 with the objective of providing retirement income to citizens. Initially, it was introduced for new government recruits, barring the armed forces but since May 2009, it has extended its reach to all citizens, including the unorganised sector workers on a voluntary basis.
There are two types of retirement accounts under NPS: Tier I account, which is the one that will fetch you the above-mentioned tax benefits, and Tier II Account, which is simply a voluntary savings facility. The minimum contribution in Tier I account is Rs 1,000 per financial year and there is no upper cap on it.