7 facts about New Pension Scheme in India (NPS)

Retirement Investment Pan NPS New pension scheme in india 

Pension Scheme in India

We have discussed about the best tax saving schemes in India in our previous week article. Many people in India may not be aware that they can get tax benefit under section 80CCD (2) by investing in New Pension Scheme which is one of the option for investment plan for retirement.

What is New Pension Scheme?

Govt. of India launched new pension scheme in Apr 2009. The purpose of this scheme is to promote security of income to its subscribers in old age. It helps to save for life after retirement + it provides good returns as it is market driven.

7 facts about New Pension Scheme in India

  1. Intermediaries for this scheme: There are 3 intermediaries here.  First one to collect your contribution amount, second is a fund manager who invests the money according to your investment decision and third is the person to keep record of your investments.
  2. Selection of Fund Manager : An investor can select the fund manager from any of the below 7 institutions. However he or she can change the fund manager once in a year (if required).

     

     

    1. UTI Retirement Solutions Ltd
    2. SBI Pension funds Ltd
    3. Life Insurance Corporation of India (LIC)
    4. IDFC
    5. ICICI Prudential
    6. Kotak Mahindra
    7. Reliance Capital
  3. Investment mix: An investor can choose the Active or auto choice (investment mix). In case of active choice, he need to pick up the investment mix of

     

     

    • Equity (High risk and high returns) – Capped to maximum of 50% of an individual contribution
    • Corporate and Gilt funds (Medium risk and medium returns; Low risk and low returns)
  4. Who can invest: Anyone who are in the age group between 18 to 60 can join this new pension scheme
  5. Investment amount: Minimum amount is Rs 6,000 per annum (Additionally Rs 500 charged per transaction) and no maximum limit. However tax exemption would be up to 10% of basic salary (Basic salary + Dearness Allowance)
  6. Withdrawals: We cannot withdraw entire amount at the time of retirement. An individual can withdraw only 60% of the contribution during retirement. However you can open Tier-2 account wherein you can withdraw the contributions from tier-2 account any time. However you need to have Tier-1 account before you open Tier-2 account. The balance 40% needs to be invested by purchasing an annuity plan from IRDA. Pension would start at the age of 60
  7. Tax benefits: For salaried individuals, the scheme needs to be incorporated by the company in which he or she is working. If not, the individual can request the company to incorporate this in their salary structure. An individual can contribute up to 10% of basic salary (Basic salary + dearness allowance only) to New pension scheme. The amount contributed would be deducted directly from total taxable income. Hence if an individual is falling under tax bracket of 20%, he would straight away get 20% rebate of his total contribution.   E.g. an individual taxable income is Rs 8 lakhs and the basic salary is Rs 6 lakhs + other allowances of Rs 2 lakhs, the maximum he can contribute to his pension scheme is Rs 60,000 (10% of basic salary). If he is falling under 20% tax bracket, he would get Rs 12,000 (Rs 60,000 x 20%) as tax reduction from his total tax. His net outflow would be only Rs 48,000 for that year (Rs 60,000 minus tax benefit Rs 12,000).

Conclusion: There are various investment opportunities for retirement investment plans which provide annualized returns 6% to 8%. In case you are a moderate risk taker, choose an investment mix suitable for you and invest in New Pension Scheme. In longer run, we feel that this would be a good investment option for retirement planning.

Readers, what is your opinion about NPS? Do you have any other better investment options for retirement investment plans?

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Suresh

Myinvestmentideas.com

Suresh KP

15 comments

  • ganesh

    I would like to have 50,000RS per month from the age of 60  years.currently I am 50. How much I have to invest in NPS. DO you advice NPS or any other scheme. Thanks.

    • Hi Ganesh, I am not sure about such computation. Yes you can invest in NPS and you can look for other alternatives like VPF to accumulate for your post retirement expenses

  • Rakesh kumar

    sub-retirment investment plans

    pl give me best plan for abive sub. my age is21.06.1968&how much ammout deposite in yearly.after that what will gain after 60 year.

    regards

    rakesh

    • Rakesh, Your retirement saving should be based on your future projections of expenses from 60th year to say 80 years (20 years). Take your current fixed expenses per annum and multiply for 20 years after considering 6% inflation every year. Say if you have monthly expenses of Rs 20,000, your annualised expenses would be Rs 240,000. Your Rs 2,40,000 considering 6% inflation would be valued @ Rs 7 Lakhs at your age of 60 (17 years from now). Means you need Rs 7 lakhs per annum from your 60th year to 80 year. So your retirement savings should be Rs 1.40 crores for you to survive from 60th year to 80th year  (after inflated adjusted returns). If you have to accumulate this money, you need to invest Rs 15K per month in a good investment option like diversified mutual funds or balanced mutual funds from now to 60 years of age.

  • Kishore

    Hello Sir,

    Previously I neglected my monthly payslips but when I calculated the tax I've paid it is nearly 35000 and I didn't saved a penny ofcourse. I realize now and started saving money so that I can save myself to pay extra tax. Please guide me here, the following way I'm planning to invest
    1. LIC Jeevan saral – 12000 per year.

    2. Post Office Term deposit – 20000 – 1 year term – Single payment

    3. I want to start investing in Mutual Funds (using SIP) – I can invest 2000 per month in SIP.

    I'm not yet married, please tell me on how to save myself from tax and as well as I have to get good returns with the money I'm spending monthly.

     

    Thank you very much in advance

    Kishore

  • Shikari Shambhu

    Sir,

    I am contemplating to invest in NPS in my personal capacity from this financial year onwards. My employer will not be making any NPS contributions. I understand that in these circumstances I will be eligible for claiming Section 80C tax benefits only and no additional tax benefits can be claimed by me. Given this background, could you kindly let me know if NPS is a recommended deferred annuity scheme or are there any other schemes which you would recommend?

    Additional factual matrix is as follows:

    I am 25 years old;

    I have reasonable investments in mutual funds, stocks and FDs;

    I am looking at creating a post retirement regular income source and in this regard, I have considered using mutual funds / stocks / FDs but none of them appear to be suited for this role;

    I have considered PPF but my view is that the relatively low / medium interest rates being offered under PPF may not be able to beat inflation in the long run;

    I understand there are no guarantees under the NPS as it is a market linked scheme thereby indicating a higher risk factor (unlike PPF which is not market linked and hence, risk level is very low);

    I understand that under the current income tax laws of India, NPS is an EET model based scheme (and not a EEE model based scheme like PPF) and also that under the proposed direct tax code the NPS is proposed to be moved to the EEE model; and

    I am raising this query using a pseudonym as sensitive personal data is mentioned in this query but the email account stated above is genuine and regularly monitored by me.

    Would appreciate your views, given the above, at the earliest. Thanks.

  • Som Bajpai

    Sir,

    My present CTC is Rs. 3.5lacs.

    Pls suggest best investment mix suitable for me to go for NPS.

    Regards,

    Som

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