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Before you pour money into the New Pension System, know the tax benefits offered by the
scheme and the tax treatment of the income.
There are three ways to claim tax deduction by investing in the NPS. Firstly, contributions of up
to Rs 1.5 lakh a year are eligible for tax deduction. If your employer has introduced NPS or you
invest in the NPS on your own, the amount you contribute to the scheme will be eligible for
deduction under Sec 80CCD(1). This deduction comes under the overall deduction available
under Sec 80CCE. Secondly, a further deduction is available under Sec 80CCD(2). Under this,
if your employer puts up to 10 per cent of your basic salary in the NPS, that amount will be
eligible for tax deduction. If your basic salary is Rs 3 lakh a year (Rs 25,000 per month), you
can avail an additional deduction of Rs 30,000 (10 per cent of Rs 3 lakh). From this year,
another additional deduction of up to Rs 50,000 is available under the new Sec 80CCD(1b).
Any taxpayer who invests up to Rs 50,000 in the NPS can avail of this deduction, over and
above the Rs 1.5 lakh saved under Section 80C.
NPS investments mature when the investor turns 60. If the corpus is less than Rs 2 lakh, the entire sum can be withdrawn. If it is more, the
subscriber must put at least 40 per cent of the corpus into an annuity to get a monthly pension. The investor can choose any annuity option as
well as the annuity provider. Till recently, the annuity had to be purchased as soon as the subscriber turned 60. But under the new rules, the
investor can wait for up to three years to withdraw the corpus. This flexibility is important because if the investor has some portion of his corpus
in stocks and the markets are down when he turns 60, he has the option to wait till the markets recover.
The maturity corpus is tax free for government employees but private sector subscribers have to pay some tax. If the individual has not received
gratuity, up to 50 per cent of the total corpus received as commuted pension will be tax free. But if he has received gratuity, only 33 per cent of
the corpus will be tax free. If your NPS corpus is Rs 1 crore, 40 per cent of this (or Rs 40 lakh) will go into buying an annuity. If you do not get
gratuity, 50 per cent of the corpus (or Rs 50 lakh) will be tax free. The remaining Rs 10 lakh will be taxed as income at the normal rate
applicable to you. Savvy investors can minimise the tax by staggering the withdrawals over 2-3 years.
NPS is a pension product and therefore, premature withdrawals before 60 were not allowed. Under the new rules, a subscriber who has
contributed for at least 10 years will be allowed to withdraw up to 25 per cent of the contribution for specific purposes, including children’s
higher education or marriage, construction or purchase of first house and medical treatment of self, spouse, children or dependent parents.
The medical treatment is only for 13 critical illnesses and life threatening injuries sustained in an accident. An investor can withdraw three times
during his tenure in the scheme but there should be a gap of at least five years between each withdrawal. However, this gap will not apply in
case the withdrawal is for a medical treatment. Also, the curbs on withdrawals are only for tier I accounts. Investments in a tier II account, which
can be opened only if you have a tier I account, can be withdrawn any time.
Unlike the PPF, there is no ceiling on the amount one can invest in the NPS. However, there is a minimum Rs 6,000 that a subscriber must
contribute in a year. There is also a 50 per cent ceiling on the allocation to equities. Till recently, the equity portion of NPS funds for private
sector employees was invested in Nifty stocks in the same proportion as their weight in the index. But now fund managers have been allowed
to invest in a wider universe of stocks. They are also no longer required to mirror the index but are free to invest as per their reading of a
stock’s potential. Investors can choose from any of the seven pension fund managers but can switch only once in a year.
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