National Pension

Option beyond Section 80C & 80D:

Being in the last quarter of the financial year, lot many taxpayers started exploring the tax saving options more aggressively. Section 80C (deduction towards LIC/PPF/NSC etc investment) & 80D (deduction towards medi-claim policy payment) are the most commonly used tax saving options used by majority of the taxpayer. Deduction towards investment in long term infrastructure bond (u/s 80CCF) is no more available from A.Y. 2013-14. However, there are certain tax benefit beyond section 80C & 80D as well which may not have been utilized by lot many taxpayers. The following two deductions could help save some tax for individual taxpayers:

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a] Deduction u/s 80CCD(1B):

Section 80CCD(1B) in the Income Tax Act-1961 offers an additional deduction of Rs. 50,000/- to the taxpayer for contribution in the National Pension Scheme (NPS).  The deduction is over and above the deduction of Rs. 1.50 Lacs available u/s 80C for contribution in LIC/PPF/NSC etc. Deduction of Rs 50,000/- under 80CCD (1B) is available to all the individuals who has not completed 60 years of age.

b] Deduction u/s 80CCG:

Section 80CCG has been inserted with effect from the assessment year 2013-14. U/s 80CCG, deduction is available to a new retail investor who is resident individual with gross total income not exceeding Rs.12 lakh. For deduction, taxpayers have to invest the amount in stock listed under BSE 100 or CNX 100 or those of PSU (public sector undertakings which are Navratnas, Maharatnas & Mini-ratnas. Even investment in Exchange Traded Fund (ETF) or Mutual Fund (MF) that have above investment in above stocks and are listed and traded in stock exchanges and settled through depository mechanism are also eligible for deduction. There is a lock-in period of 3 years in the scheme.

If a resident individual claims a deduction for the assessment year 2013-14 u/s 80CCG, he shall not be entitled for any deduction under this section for any subsequent year. In other words, for the assessment year 2013-14, the deduction is available only in one assessment year to the extent of 50 per cent of amount invested during the previous year 2012-13 or Rs. 25, 000 whichever is less. However, this provision has been amended from the assessment year 2014-15. The modified provision permits deduction for three consecutive years, beginning with assessment year relevant to the previous year in which the listed equity share or listed units of equity oriented fund are first acquired.

 

c] Other deductions:

Individual taxpayer can further explore the possibility of claiming deduction u/s 80E towards payment of interest on loan taken for higher education, U/s 80DDB towards medical treatment of a specified disease/ailment, U/s 80G or U/s 80GGA towards donation to recognized trust/institutions etc.

NPS:
Any citizens of India between 18 – 60 years of age, whether resident or non-resident, are eligible to subscribe NPS. In the present specific case, your son can continue depositing Rs. 50,000/- in the NPS A/c to claim deduction under section 80CCD(1B).

1. About National Pension scheme (NPS):
   

   With a view to promote social security measures and to provide the citizens with pension support, NPS was originally introduce for the Government employee’s long back in 2004. The scope of scheme was later on extend in 2009 so as to cover the private sector employee as well as self employed taxpayer. And now, the benefit of the scheme has been extend so as to include self employ citizens also.

 

NPS is a voluntary pension scheme regulate by Pension Fund Regulatory and Development Authority (PFRDA).  Any citizens of India between 18 – 60 years of age, whether resident or non-resident, are eligible to subscribe NPS. With fund management charge of mere 0.25% p.a., NPS is cheapest market linke online financial product.

2. Tax benefit:
   

   Many taxpayers are still not aware of NPS as a tax saving tool. Section 80CCD(1B) in the Income Tax Act-1961 offers an additional deduction of Rs. 50,000/- to the taxpayer for contribution in the National Pension Scheme (NPS). The deduction is over and above the deduction of Rs. 1.50 Lacs available u/s 80C for contribution in LIC/PPF/NSC etc. Deduction of Rs 50,000/- under 80CCD (1B) is available to all the individuals who has not completed 60 years of age.

3. How to Invest:
   Being a new product coupled with the fact that almost zero commission offered for the intermediaries & financial consultants, the scheme remains low on popularity & accessibility. As a first step, investor needs to register with the NPS by getting an application form from Point of Presence-Service Provider (POPSP) or download it from the NSDL website npscra.nsdl.co.in.

4. Fill up the form and submit it at any nodal office of a POP-SP. One has to submit copies of proof of identity and residence (passport, Aadhar card, ration card, voter ID, driving license, utility bills, etc) along with the application form. Carry the original document for verification by the POP-SP. Even easy online application can also be done. If mobile number is link with the Aadhar card of the applicant.
5. Just log on to the NSDL website www.enps.nsdl.com, punch the Aadhar number and after receiving & validating one time password (OTP), the investor’s details and photoare automatically fill up in the online form. Investor has to upload a scanned signature and a photograph if he doesn’t want the Aadhar picture. After uploading the form, the screen would be route to a payment gateway for the initial contribution in the NPS account. The minimum amount is Rs. 500/-.
6. It can be pay by debit or credit card or Internet banking.  After making the payment, a Permanent Retirement Account Number (PRAN) will be allotted to the subscribers & a welcome kit from the PFRDA containing a PRAN card, IPIN, TPIN and scheme details is also forwarded.

Choosing a pension fund & Asset mix:
In the form, investor is require to mention the pension fund where he want to invest in. There are seven pension funds available to investors in the general category. An investor can switch to another pension fund only once in a year so choose very carefully. Go for a fund house that has consistently done well in the asset class you want to invest in. Further, Investor have the option to actively decide as to investment of NPS contribution amongst the  following three options

a] Asset Class E – Investments in predominantly equity market instruments. (Not more than 50% is allow for investment in equity).
b] Asset Class C – Investments in fixed income instruments other than Government securities.
c] Asset Class G – Investments in Government securities.

NPS offers an easy option for those investor who do not have the required knowledge to manage their NPS investment in the form of “Auto choice” option. In this option, asset allocation here depends on the age of the investor. Till the age of 35 years, 50% of his corpus will be in the equity funds. And the rest in corporate debt and gilts. Every year, 2% of the assets in the equity fund and 1% of the assets in corporate bonds will be shifte to the gilt fund. In five years, by the time he is 40, the equity exposure of his NPS corpus would be down to 40%. By the time he is 55, he would have only 10% in equities, 10% in bonds and 80% in gilts.

How to make an investment in already opened NPS Account:

To deposit in Tier I and Tier II account. The subscriber can make contribution amount along with duly filled NCIS (NPS Contribution Instruction Slip) to any POP-SP.

In case of Corporate subscribers, contributions are normally deduct from the Subscribers salary. And the same is transfer by Corporate (CHO) to the POP who in turn credit. The amount to the respective subscriber accounts. A Corporate subscriber can also make voluntary contributions to his/her account by contacting the concerne associat POP of the Corporate.

Susbcribers can also opt for online transfer of funds towards his Tier I and Tier II account by logging at NPS site which is self explanatory and easy to use. For details the Subscriber can also contact the POP-SP providing such facilities.

Difference between Tier 1 & Tier 2 account:

The National Pension Scheme is well divided into two distinct categories, namely Tier 1 and Tier  2.

Tier 1 is the most basic form of NPS Account whereas Tier 2 is an account which have  more flexibility in terms of withdrawal rules.

Subscribers of NPS Tier 2 Account are free to withdraw their money as and when they want and that too without any penalty fee.

Tier 2 Account is a voluntary contribution scheme and hence the flexibility that is attached to it.

Features of Tier 2 NPS Account

Some of the prominent features of Tier 2 NPS Account which differentiate it from the Tier 1 account are as under:

• Tier 2 NPS Account can be looked at as a liquid version of the NPS Tier 1 Account since there is flexibility to withdraw with the subscriber.
• Note carefully that Tier 2 NPS Account does not have a locking period for funds invested in the same, there is no tax rebate also that applies. Hence, money invested in NPS Tier 2 Accountis not tax deductible under section 80C of the Income Tax Act.
• No penalty fee is charged from the subscriber in case he/she withdraws from the NPS account prematurely.
• Contributions towards the Tier 2 NPS Account can be made using your permanent retirement account number, PRAN.
• Choice of three funds to invest your money in. However, money is partially put in two or more of these funds
• Customers can choose between Equity Funds
• Government Securities and Fixed Income Instruments other than Government Securities.
• Tier 2 NPS Account is a good savings and investment option for customers who are looking for an instrument which is a medium-term investment tool.
• Only 50% of the fund can be invested in equity-fund. This feature dilutes the cost effectiveness of this financial tool as against other means of investment.
• There is no limit on the number of times you can withdraw money from the NPS Tier 2 Account.
• Nomination facility is available with this account.
• Facility of one-way money transfer from Tier 2 to Tier 1 NPS Account.

In order to obtain an NPS Tier 2 Account, following is the eligibility criteria that needs to be fulfilled.

• Any citizen of India, resident or non-resident can join the National Pension System and can obtain the NPS Tier 2 Account.
• An active Tier 1 NPS Account is a prerequisite of obtaining a Tier 2 Account.
• Individual needs to be 28-60 years of age on the date of submission of NPS form.
• Non Resident Indians are also eligible to register for the NPS scheme

Taxation Process of Funds in the NPS Tier 2 Account

Main difference between Tier 1 & Tier 2 is on account of taxation treatment.

Unlike the Tier 1 NPS Account, Tier 2 NPS Account does not qualify for tax rebate under section 80C of the Income Tax Act.

This is because NPS Tier 2 Account does not have a locking period for funds which Tier 1 Account has. However, withdrawals are taxed according to the time at which withdrawal is made. That is, withdrawals within a year of investment attract short-term capital tax while those after a year of depositing earn long-term capital tax.

For debt funds it is 10% while for equity funds the tax applicable is nil.

National Pension

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