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February 27, 2017

Tax boost makes NPS more attractive

The National Pension System (NPS), which was opened to the masses in 2009 with the objective of providing retirement income to all Indian citizens, has gained popularity in recent years as the government strives to make it an attractive investment medium. The latest budget gave the plan a shot in the arm by enhancing the contribution and liquidity benefit. This article highlights the recent measures and provides a ready reckoner on the plan.


Other features and benefits


Professional management – NPS investors enjoy the expertise of professional fund managers appointed and regulated by Pension Fund Regulatory and Development Authority (PFRDA). Investors can choose from seven fund managers and change the fund manager if not satisfied with the performance.


Asset allocation – The NPS helps investors in life cycle investing which follows the asset allocation model. Life cycle investing is based on the premise that  investments in different asset classes should be made based on the risk profile since investment needs and risk-taking ability change as investors go through arious life stages. For investment purposes, the NPS provides investors the flexibility to invest in a mix of three asset classes - E (equity fund), C (corporate bond fund) and G (government securities fund).


Flexibility in terms of investment choice – The scheme also offers flexibility with two investment choices based on investors’ wherewithal. A.) Active choice individual fund gives investors the flexibility to allocate assets between the three asset classes (E, C and G). It offers three options – Aggressive, Moderate and Conservative Life Cycle Fund having equity exposure up to 75%, 50% and 25% respectively. B.) Auto choice lifecycle fund is the default option wherein asset allocation is linked to the age of the investor and changes over the life span in a pre-determined manner. It is suitable for investors who are not well-versed with asset allocation and how to change it dynamically in sync with risk-return objectives.


Additional tax benefits (include the vesting benefits) – Apart from deduction of up to Rs 1.50 lakh under Section 80 CCD (1), investors can also avail additional deduction of Rs 50,000 under Section 80 CCD (1b). Hence, investors can save additional tax of Rs 15,000 (for highest tax bracket of 30%) over and above tax savings of Rs 45,000. Additionally, at the time of maturity (age of 60), investors can withdraw 60% of the vesting amount and out of this 40% is tax-free. Investors need to compulsory use at least 40% of total corpus in buying annuity which is taxable as per the individual income tax slab in the year of receipt. Here, too, investors can get minimum exemption as per senior citizen tax slabs, resulting in deferring the tax outgo. 


Low cost - The fund management charge for the scheme is just 0.01%, which means investors need to pay only Rs 100 for a corpus of Rs 10 lakh. The cost towards the central record keeping agency (CRA) would also reduce from the new fiscal with the introduction of second CRA to the plan. However, investors need to pay some charges toward Point of Presence (POP) and custodian.