Home » News » Personal Finance»Retirement
Apr 16, 2012, 11.05 AM | Source: Moneycontrol.com

Understanding the NPS scheme offered by employers

New Pension Scheme (NPS) is a pension scheme launched by Government of India (in effect from 1st April, 2009) and is a defined contribution based pension scheme.

BankBazaar.com

New Pension Scheme (NPS) is a pension scheme launched by Government of India (in effect from 1st April, 2009) and is a defined contribution based pension scheme. NPS differs from the existing pension scheme in the sense that existing pension fund of Government of India offers assured benefits while NPS has defined contribution structure where an individual can decide where his contributed money will be invested. NPS is intended to resemble a 401k plan offered for US employees but not in totality. NPS will follow EET (Exempt Exempt Taxable) structure similar to its global peer but the withdrawal amount after the age of 60 cannot remain invested nor can be withdrawn fully. Another important difference being premature withdrawal is subject to few life changing situations. Let's explore other aspects of this scheme.

Product Structure

The scheme is available in two forms:
1. Tier-I account -  Premature withdrawal not allowed
2. Tier-II account - Premature withdrawal allowed

Features

Until now the pension schemes were available to Government employees and employees of big firms who have provident fund facility. With NPS common man gets an entry to the system. The other important features of the schemes are:

1. Low Cost - Annual Fees of .00009% (90 paisa for Rs 10,000) for fund management
2. You can choose from six different funds for investment
3. Withdrawing from one fund and investing in another will not have any tax implication
4. No upper limit on Investment
5. Minimum limit of investment is 6,000 per year
6. Tax benefit over and above the current limit of 1L under sec 80C
7. All citizens between 18 and 55 years can invest in NPS

Taxation

Under the newly introduced Section 80CCD (2), up to 10% of an employee's basic salary put in the New Pension Scheme is tax deductible. If you fall in the 30% tax bracket, the NPS investment under Section 80CCD (2) will reduce your tax liability by almost 15000. Now onwards, NPS will be more beneficial from the tax angle. From the next financial year, contributions by employers to the NPS accounts of their employees can be deducted as a business expense which was not allowed till now. As such contributions will not be part of the Rs. 1 lakh tax deduction limit under Section 80C, your employer's contribution on your behalf will be a tax free benefit for you.

Fund withdrawal

Premature exits before 60 years
' You will have to invest 80% of accumulated wealth to purchase a life annuity from registered life insurer
' The remaining 20% is liable for withdrawal as lump sum

Exits after 60 years
' You will have to invest at least 40% of pension wealth to purchase an annuity

No exits till 70 years
' Beneficiary account will be closed and the accumulated amount will be transferred in lump sum

In case of death of the scheme holder nominee will receive the whole amount as lump sum.

NPS scheme on its own vs. the one offered by the employer

If the employer is offering NPS he will be making an equal contribution in the scheme from his side. The structure will be of Tier-1 type where premature withdrawal will not be allowed. You will be liable for additional tax benefit on the employer's contribution.

Additional to above structure individual can also choose a voluntary tier-II account having premature withdrawal facility. Government and employers will make no contribution into this account. The accumulated wealth in this account can be withdrawn anytime without stating any reason.

Benefits to investors

1. Additional tax saving ' Both employers and employees will get tax exemption on their contribution
2. Low cost of fund management ' The fund management cost is very low, which will enhance the returns
3. Higher return potential as compared to old plans ' As it's a defined contribution plan, investors can choose from the 6 funds available for investment for better returns.  Rebalancing of accumulated amount is free of cost so you can always invest in the best fund.

The Drawbacks

1. Tier 1 option doesn't give much flexibility ' It's a rigid structure. A little flexibility with respect to premature withdrawal would have made it more lucrative.
2. Annuity rates post maturity is not fixed ' There is no floor rate decided so you cannot be sure of the returns until maturity.
3. Fund management costs might increase in future ' Depending on the pension liability and costs involved this rate might shift northward.
4. Only six fund managers makes it a risky proposition ' If we take into account the working population of India this number seems to be pretty risky. As the number of subscribers increase hopefully government will increase this number.

How does employee and employer benefit?

The scheme will benefit both employees and employers a like when they participate. Employees get tax deduction on their contribution and from next financial year employers will be in a position to show their contribution as business expense generating additional tax benefits for the firm.

Content partner:


BankBazaar.com is an online marketplace where you can instantly get the lowest loan rates , compare

ADS BY GOOGLE

Ask the Experts

Get your Personal Finance queries answered

  • Q

    If I put Rs 2 lakh in PPF, how much tax rebate I will get?

    A

    As per the existing guidelines and rules a person cannot deposit more than 1.5 lacs in one PPF account. However you can deposit money in the...

  • Q

    Interest rates are going to go down. And all my fixed deposits will be maturing next year. I will have to renew my fixed deposits next year at lower rate of interest. What is the way out?

    A

    Interest rates keep fluctuating due to various micro- and macro- economic factors. There is never an ideal rate of interest. In a high inter...

  • Q

    I want to buy online term life insuance plan. Which is the best one? Should I go for single premium or regular premium policy?

    A

    Single premium term insurance policies don?t make much sense. Why pay such a large amount at one go when you have the option of paying in sm...

  • Q

    I want to invest some money with at least ten years view. I dont want share market risk. Can I invest in NSC? Is there any other investment option?

    A

    NSC or National Savings Certificate is a safe investment scheme offered by the Central Government. It is an ideal option for investors with ...

  • Q

    Is it a good idea to invest in asset allocation funds? if yes, please suggest some good fund to invest money. I am 35 years old and can invest Rs 10000 per month.

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    My CA says that I have to pay tax on interest accrued on my FD of Rs 20 lakh. I have submitted form 15H in all banks. Is it necessary to pay tax in this case?

    A

    In case of interest on fixed deposits which is taxable under the head ?Income from other Sources? a taxpayer has two choices. Either you can...

  • Q

    Please suggest a good investment option of land in South India. I want to buy a land parcel of around 2 acres.

    A

    If you take a look at the South Indian real estate market, Bangalore has emerged as a clear winner. Due to the strong presence of IT/ITeS an...

  • Q

    I want to invest Rs 20000 per month. I have identified Reliance Small Cap Fund and DSPBR Micro cap fund for investment. I can hold to investments for two years. Is it a good idea to invest in these schemes? How much returns I will be getting?

    A

    If you are an aggressive investor, you can consider investing in either of the 2 funds.DSPBR Micro Cap My suggestion is that if you are inve...

  • Q

    I want to save my money for retirment Please suggest a good insurance policy

    A

    For retirement it is advisable to use multiple investment instruments and not just life insurance policies. If you have 15 years or so for r...

  • Q

    IS IT a Good time to invest in GOLD ?

    A

    Currently the outlook for gold is bearish/negative. However if you are planning for a long-term investment in gold it is ideal to invest the...

  • Q

    I have retired from my job in November. I have got Rs 48 lakh from my employers, by way of epf, gratuity and other benefits. Should i invest in senior citizen scheme of LIC? How about pension plans from LIC?

    A

    1. You can invest Post office Senior Citizen Scheme. 2. You also should invest lumpsome in MIP in post office and get monthly interest. 3. K...

  • Q

    I want to save Rs 1 crore for my retirement when i turn 60. Now I am 42 years old and have fixed deposits worth Rs 18 lakh.What should I do to reach Rs 1 cr mark?

    A

    start investing a minimum 5000 per month in mutual fund and increase 10% to 20% every year....

  • Q

    I want to save on my utility bills and fuel expenses.Please suggest a good credit card for me.

    A

    Yes, you will be able to save on Utility bills and fuel expenses through the cash back schemes offered by some of the credit card companies....

  • Q

    Suggest couple of equity mutual funds for me. I am keen to invest Rs 25000 per month for next couple of years. I can remain invested for at least five years?

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    I am a senior citizen.I received interest of Rs .1,70,000/- on FD.I have duly filled 15G form.I have NO other source of income.Have I to pay Income tax on this interest or can it be excempted?

    A

    Sir, please note if you are less than 80 years but more than 60 years of age, your total income upto Rs 3,00,000 is exempt from tax, you are...

  • Q

    Please suggest a good money back policy for me. I am 27 years old and want to accumulate Rs 10lakh over 10 years.

    A

    If you are a fan of traditional money back policies, go in for the LIC New Money Back Policy of 20 or 25 years. I would suggest you go in fo...

  • Q

    I want to buy a life insurance for my brother Please suggest a good policy. He is 19 years old. he should get Rs 5 lakh when he turns 25 years.

    A

    Best to go in for a ULIP in case he is looking to grow the money also. Go in for a ULIP like HDFC Click 2 Invest which is very low on charge...

  • Q

    In 2013, I bought an Endowment policy from LIC. Premium for that is around 35K per year. Now i understand, this was a big mistake and i want to go for a term insurance policy. I have already paid two premiums in 2013 and 2014 and I want to make this policy paid-up. Can i pay one more premium this year and make that endowment policy paid-up ? Or is there any better alternative ? Please suggest.

    A

    Yes, you can convert to a paid-up policy after 3 years premiums have been paid. I would recommend that you surrender the plan and take back ...

  • Q

    Is zero depreciation cover a good option under auto insurance? I have plans to buy honda city in January

    A

    Zero depreciation is a good option to along with the standard car insurance plan. By paying a slightly increased premium you can ensure that...

  • Q

    I am 20 years old,I am getting 17+ % or returns from share in my portfolio consistently for the last 6 months.should i think about a career in stockbroking?

    A

    Its nice to note that your portfolio has been gaining such high returns, however it might be too early to take a call and make stockbroking ...

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.