NPS Withdrawals Made Partially Income-Tax

NPS Withdrawals Made Partially Income-Tax

Finance Minister Arun Jaitley proposed to make withdrawals from the National Pension Scheme partially tax-exempt in the Union Budget, giving a big boost to the retirement benefit scheme.

Under current tax laws, withdrawals from NPS did not enjoy any tax-free status and this was a big dampener, but once the Budget proposal comes into force, withdrawal up to 40 per cent of the corpus in NPS will be tax exempt.

NPS allows for an exit at the age of 60 years and investors have to annuitise (invest in pension schemes) a minimum of 40 per cent of the corpus. In other words, if investors annuitise a minimum 60 per cent of NPS corpus, they are not required to pay any tax on withdrawal.

But income received from investment in annuity is treated as income and is taxed accordingly. The minimum contribution in NPS is Rs. 6,000 annually.

NPS allows an additional tax deduction of Rs. 50,000 over and above the limit of Rs. 1.50 lakh available under Section 80C. This means that if investors put Rs. 50,000 for getting the additional tax benefit under section 80CCD, they can save Rs. 5,150, Rs.10,300 and Rs.15,450 for the tax brackets of 10 per cent, 20 per cent and 30 per cent, respectively.

NPS also offers additional tax deduction on employer contribution up to 10 per cent of basic salary, plus the dearness allowance, under 80 CCD(2) of the Income Tax Act. Under the NPS Corporate Sector Model, both the employer and employee can contribute equally towards the retirement corpus in addition to contributions towards the employee provident fund.

Financial planners say tax benefits should not be the important factor for investing in NPS. “Tax benefits should not be the deciding factor. NPS money gets locked in for the long term and only partial withdrawal is allowed. So investors should be first comfortable that their money will remain locked in for a long period,” said Manoj Nagpal, CEO of Outlook Asia Capital, a wealth management firm.

Also, tax benefits don’t make a big difference in very long-term investments, he added.

Contributions under NPS get invested across three asset classes: equity, corporate bonds and government securities. Investors are free to decide on their asset allocation among the three schemes but the exposure to equity asset class cannot exceed 50 per cent.

The key benefit with the NPS is that it allows investors to add higher equity component to the retirement kitty as compared to EPF.

Investors also get to choose the pension fund managers to manage their money. The track records of the pension fund managers are on their websites. On the other hand, the Employees Provident Fund Organisation, which manages provident fund money, is allowed to invest just 5 per cent of its incremental deposits in equities.

Source : NDTV