Friday, March 20, 2015

National Pension Scheme (NPS) Save and Earn..

In times of uncertainty when Job security levels are declining due to ever changing technology, retirement planning becomes very vital. Retirement planning is also vital as most of the private sector jobs do not offer any pension post retirement. It make sense if people make a habit of saving at a very young age to protect the future.

But usually investment in pension funds means  short term pains with a hope of long term gains. Why hope, because a pension plan may not provide us the required return due to market conditions.

Recently announced budget gives few positives of investing in pension funds where the pain of parting with money and liquidity is slightly reduced. People can now directly invest in (NPS)National Pension Scheme for gaining income tax exemption. The exemption was previously available only when the investment was made by employer for employee. NPS now provides us the tax exemption  upto investment of Rs 50000 annually under section 80 CCD which is outside regular 80C limit of 150000 per year. So with this new announcement, it provides us with a dual advantages of both short term gains as well as long term security. People falling in highest tax bracket can save upto 15,000 Rs by investing in the scheme.

People who are not worried about liquidity or nearing age of  60, can benefit the most out of this investment. The money investment in NPS can only be withdrawn at the age of 60. To get benefit for 80CCD, one has to put money in Tier 1 account, where only upto 20% of the sum can be withdrawn after retirement and rest is converted into monthly pension(annuity).

NPS provides multiple option of choosing between various debt and equity capital allocation based on the risk profile of the individual. So one can invest in even pure debt instrument which will provide nearly 7% to 8% return ( based on prevailing interest rates) negating any chances of capital loss. For people in even 10% tax bracket, the first year return will be close to 18% which is not available in any safe financial instrument.

In all its a good scheme who is not short of funds and ready to part with some funds for a long period of time for good long term gains. The only current issue with NPS is the taxability part at the time of withdraw of money or annuity payments. As per the current law the income is taxable at the time of withdraw however the rules are not clear if indexation benefits which are currently available with debt schemes can be applicable. In case the indexation benefits are available, the scheme is still better than debt based scheme. The clarity of this should be brought about by Union Government about it.  I strongly feel that the issue of indexation will be sorted and eventually allowed by the government.


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