A 40% bonanza on NPS- Business News
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A 40% bonanza on NPS

Tax breaks in Budget 2016 make NPS an attractive option.

  • March 28, 2016  
  • |  
  • UPDATED   17:59 IST
Photo: Images Bazaar
Photo: Images Bazaar

Budget 2016 has proposed to make National Pension System (NPS) partially tax-free on maturity. As per the scheme, you could withdraw 60 per cent of your corpus at age 60, and use the remaining to purchase a life annuity. The 60 per cent you withdrew was chargeable to tax earlier. With this budget, 40 per cent of that corpus is free and only 20 per cent is charged to tax. However, if you choose to invest even that 20 per cent in annuity, you have a completely tax-free option, except for the tax liability arising out your annuity income. The aim of these changes is to encourage people to opt for NPS as the scheme has failed to catch the fancy of corporate employees and voluntary subscribers for whom it was thrown open in 2009. Should you invest in NPS after the recent tax benefits?

Tax benefits

  • Withdrawals from NPS on maturity are now tax free up to 40 per cent
  • Investment in NPS allows you to avail deduction up to Rs 1.5 lakh under section 80C
  • Additional rebate on investment of Rs 50,000 can be claimed under 80CCD (1B). This is exclusively for NPS and over and above the 80C limit.
  • You can also avail tax benefits on corporate NPS. The employer's contribution of up to 10 per cent of basic plus DA is eligible for deduction under Section 80CCE over and above the Rs 1.5 lakh limit.

Structural benefits
  • To cash in on the long-term nature of retirement funds, NPS allows you to invest up to 50 per cent in equity
  • Over long periods, equity has given the highest return among all asset classes, you can thus grow your retirement corpus at a faster rate
  • It is one of the lowest cost retirement products, with fund management charges as low as 0.01 per cent

EPF vs NPS
  • It is compulsory to buy annuity out of the 40 per cent of your NPS corpus on maturity. Considering annuity rates are as low as 4-5 per cent, you will be forced to invest money in low-return products.
  • It is not mandatory to buy a pension product on maturity under EPF. You can withdraw a lump sum and invest as you wish to get yourself a regular stream of income.
  • EPF does not invest your money in equity
  • Though an attempt was made to make EPF partially taxable under this Budget, it was subsequently rolled back. EPF thus stays entirely tax-free on maturity, while NPS is 20 per cent taxable, and 40 per cent has to be compulsorily ploughed into annuity schemes.
  • While EPF allows complete withdrawal, in NPS you can withdraw only 60 per cent on maturity
  • Last year, the budget proposed to give salaried people the option to choose between EPF and NPS. There has, however, been no further elaboration.
What to do?
  • NPS has become attractive considering the recent tax benefits
  • It is, however, not so attractive for old people as they cannot cash in on long-term equity benefits

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