Sunday, 8 May 2016

Kisan Vikas Patra (KVP)

Kisan Vikas Patra(KVP) is a small saving scheme which was initially launched in 1988. It was later discontinued in 2011 after the recommendation of a committee that KVP can be misused for money laundering. It was introduced again in 2014 with some changes to make it safer like -

  • KYC norms are a must now like any other small saving scheme. So identity proof and residence proof are required now.
  • PAN is also required if invested amount is more than Rs. 50,000.

Denominations of certificate

The Kisan Vikas Patra is available in denominations of Rs. 1,000/-, Rs. 5,000/-, Rs.10,000/- and Rs. 50,000/-.

Any number of Certificates may be purchased which means there is no upper ceiling.

Who is eligible for investing in KVP

A KVP certificate can be issued to an adult for himself or on behalf of a minor or to a minor. It can also be issued jointly to two adults.

KVP is not available to companies. Hindu Undivided Family (HUF) and NRI also can't invest in KVP.

Procedure for purchase of Certificate

In order to purchase KVP certificate a duly filled Form A should be presented at a Post Office or Bank.

Modes of payment - Payment for the purchase of a Certificate may be made in any of the following modes, namely:-

  • By cash
  • By locally executed cheque, pay order or demand draft drawn in favour of the Post Master
  • By presenting a duly signed withdrawal form or cheque together with the passbook for withdrawal from Savings Account standing in credit of the purchaser at the same Post Office or Bank.

If payment is not done using cheque, pay order or DD a Certificate shall be issued immediately and the date of such Certificate shall be the date of payment.

Where payment for the purchase of a Certificate is made by cheque, pay order or demand draft the Certificate shall not be issued before the proceeds of the cheque, pay order or demand draft, as the case may be, are realised and the date of such Certificate shall be date of encashment of the cheque, pay order or demand draft, as the case may be.

Type of Certificates

Kisan Vikas Patra (KVP) are of the following types -

  • Single holder type Certificates - This type of certificate may be issued to an adult for himself or on behalf of a minor or to a minor.
  • Joint 'A' type Certificates - This type of certificate may be issued jointly to two adults payable to both holders jointly or to the survivor.
  • Joint 'B' type Certificates - This type of certificate may be issued jointly to two adults payable to either of the holders or to the survivor.

Rate of interest on KVP

From FY 2016-17 rate of interest on KVP is 7.8%. Which means amount Invested doubles in 110 months (9 years & 2 months).

Note that previous rate of interest was 8.7% (People who bought KVP till last fiscal year will get the same rate of interest i.e. 8.7%). With that rate of interest amount invested doubled in 100 months (8 Years & 4 months).

Tax treatment of KVP

There is no tax benefit for investing in KVP. Amount invested in KVP is not eligible for deduction under section 80C. Also the accrued interest is taxable.

There is no official intimation that TDS will be deducted on the interest accrued so it would be safe to assume that TDS is not there.

Kisan Vikas Patra maturity

KVP matures when the amount invested is doubled, so based on the current interest rate (FY 16-17) of 7.8% maturity time is 110 months (9 Years and 2 Months).

Pre-mature encashment of KVP

One advantage of KVP is that KVP certificate can be encashed any time after expiry of two years and six months from the date of issue of Certificate. Based on a pre-determined calculation you will get your prinicipal + interest value for the invested time period.

KVP may also be prematurely encashed any time under the following circumstances, namely :-

  • On the death of the holder or any of the holders in the case of a joint holder;
  • On forfeiture by a pledge being a Gazetted Government officer
  • When ordered by a court of law

Transfer of Certificate from one person to another

KVP certificate may be transferred from one person to another with the consent in writing to an officer of the Post Office or Bank.

Cases in which transfer can be sanctioned are -

(a)

  • From the name of a deceased holder to his heir.
  • From a holder to a court of law or to any other person under the orders of court of law.
  • From a single holder to the names of joint holders of whom the transferee shall be one.
  • From Joint holders to the name of one of the joint holders.

(b)

  • From Single or joint holders to another person.

Transfer from Post Office to Bank and vice-versa

A Certificate may be transferred from a Post Office or Bank at which it stands registered, to any other Post Office or Bank to the holder or holders making an application in Form B either at Post Office or Bank.

Nomination

Nomination facility is provided for the Kisan Vikas Patra. For that Form C has to be filled. In case, nomination is not made at the time of purchasing the Certificate, it may be made at any time after the purchase of the Certificate but before its maturity.

Pledging KVP certificate as security

Another adavntage of KVP is that this certificate can be used as a collateral against a loan from the bank or in other cases where security deposit is needed.

To sum it up let's see some of the pros and cons of the KVP -

Pros of KVP

  1. Risk free as the returns are fixed and secure.
  2. It provides some liquidity as it can be encasehd after 2&1/2 years.
  3. It can be pledged as a collateral.
  4. TDS is not deducted on the interest earned. However, it is the responsibility of the certificate holder to show the interest income and pay the taxes accordingly.

Cons of KVP

  1. Though KVP was a favourite small saving scheme at one time but now it is not a good investment, when interest rate is drastically reduced to 7.8% (FY 2016-17). For long term investment PPF or SSY is a much better option.
  2. For shorter term (if fixed return is needed) 5 year Bank FD is a some what better option, though interest rate offered currently will be less than what is offered for KVP, at least it is eligible for tax deduction. You can break it too, of course some penalty will be levied.
  3. There is no tax benefit either so for people who are falling under income tax slabs there are other better avenues to invest than KVP.

That's all for this topic Kisan Vikas Patra. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Friday, 29 April 2016

Tax exemption benefits of National Pension System(NPS)

National Pension Scheme (NPS) was initially started as a pension plan for the Govt employees in 2004. Later, in 2009, it was openend for all citizens of India. But it didn't attract that many investors because of the long period of investment, tax on the corpus at maturity, manadatory buying of annuity, no scope for partial withdrawal and no special tax benefits to wean people from the investments they are used to.

So government tried to make amends and came up with some special tax benefits to attract more people to invest in NPS and bring them under some sort of social security.

Before going into what all tax benefits are available for the investors investing in National Pension System(NPS) lets have a small primer on the IT sections under which these deductions are given as there are sections and sub-sections making it a little confusing.

  • Sec 80CCE - This section doesn't provide any deduction, it just states that the aggregate of deduction under section 80C, 80CCC and Section 80CCD(1) shall not exceed Rs. 1,50,000 (1.5 Lakhs which is the current exemption limit FY 2016-17).
  • Sec 80CCD(1) - Employees own contribution to NPS is eligible for tax deduction under sec 80CCD (1) of Income Tax Act up to 10% of salary.
  • Sec 80CCD 1(B)- Additional deduction to individuals for contribution in their NPS account subject to maximum of Rs. 50,000/- which is in addition to the deduction allowed under Sec. 80CCD(1).
  • Sec 80CCD (2) - Employee also gets tax deduction for the contribution made by the employer under section 80 CCD (2) of IT act upto 10% of salary (Basic + DA) which is in addition to the tax benefits available under Sec. 80CCE.

With this general understanding of the IT sections let us see the tax benefits available to individuals investing in NPS.

Tax benefits for investment in NPS

There are 3 ways an employee can claim tax benefits for NPS investment (For self-employed only two are possible). Note that these deductions are permitted only for Tier-I account.

  1. Employee's contribution - Employee's own contribution to NPS is eligible for tax deduction under Section 80CCD (1) of IT Act. The maximum amount that can be claimed by an employee under 80CCD (1) is 10% of salary (Basic + DA). In case of self emplyed it is 10 % of gross income. If your contribution is more than 10% of Basic + DA then you can claim only upto 10% of Basic + DA.

    Another restriction here is that this deduction is with in the overall limit of 1.5 Lakhs under Sec 80CCE where you have other items too like investment in PPF or SSY, paying Life insurance premium, contributing to EPF etc.

    One more thing to note here is that with in Sec 80CCE which has ceiling of 1.5 Lakhs, Sec 80CCD (1) had a clause that deduction under this section shall not exceed Rs. 1,00,000 (Rs. 1 Lakhs) but that limit has also been increased from FY 2015-16 to Rs. 1.5 Lakhs.

  2. Employer's contribution - Employee also gets tax deduction for the contribution made by the employer under section 80CCD (2) of IT act upto 10% of salary (Basic + DA). Good thing is that this deduction is in addition to the tax benefits available under Sec. 80CCE which means it is over and above the 80CCE limit of Rs. 1.5 Lakhs.
  3. Additional tax deduction - Since many people already exhaust the limit of 1.5 Lakhs with existing investments like EPF, PPF, life insurance preimum etc. so in order to lure them to NPS an additional benefit of Rs. 50,000 is provided under section 80CCD 1(B).

    From F.Y. 2015-16, subscriber will be allowed tax deduction in addition to the deduction allowed under Sec. 80CCD(1) for additional contribution in his NPS account subject to maximum of Rs. 50,000/- under sec. 80CCD 1(B).

That's all for this topic Tax exemption benefits of National Pension System(NPS). If you have any doubt or any suggestions to make please drop a comment. Thanks!


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  2. National Pension System(NPS) investment choices - Active or Auto
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Saturday, 23 April 2016

National Pension System(NPS) investment choices - Active or Auto

National Pension System offers two types of investment choices.

  • Auto choice
  • Active choice

Before going into the details of these two choice one more thing you should know is the Asset classes where your money is invested when you contribute to NPS.

Asset Classes permitted for NPS

There are 3 types of asset classes which are permited for NPS funds investment. These assets are segregated based on the risk they carry -

  • Equity (Asset Class E) - Investments in predominantly equity market instruments. According to new rules for private sector emplyees apart from exchange traded funds now fund managers can also invest in other stocks (listed in BSE or NSE with M-cap of 5,000 crore), units of mutual funds in addition to exchange traded funds.

    Note that maximum investment in this class is 50% of total contribution whether you choose active choice or auto choice.

  • Corporate Bonds (Asset class c) - Investments in Corporate bonds, that may be PSU bonds as well as private companies bonds. Some of the examples are infrastructure bonds that were issued by PSUs, non-convertible debentures of PSUs or private companies.
  • Government Securities (Asset class G) - Investments in Government securities.

So these are the assets where your contribution is invested. Now let's see the investment choices you have in National Pension System (NPS) and how they work.

Active Choice

If an individual choses active choice then he can decide on the asset classes in which the contributed funds are to be invested and their percentages. Note that in Asset class E maximum contribution can't go beyond 50% even in active choice. Though subscriber can invest 100% of contribution to Government Securities or Corporate Bond Fund if he wants to do that.

Auto Choice

If an individual doesn't have the required knowledge or doesn't want the headache of tracking and adjusting his NPS investments, he can opt for Auto choice. Under this choice management of investment of funds is done automatically based on the age profile of the subscriber. At each birthdate of the subscriber, these proportions are adjusted with age as mentioned in the life-cycle matrix.

Age E (%) C (%) G (%)
< = 35 50 30 20
36 48 29 23
37 46 28 26
38 44 27 29
39 42 26 32
40 40 25 35
41 38 24 38
42 36 36 41
43 34 22 44
44 32 21 47
45 30 20 50
46 28 19 53
47 26 18 56
48 24 17 59
49 22 16 62
50 20 15 65
51 18 14 68
52 16 13 71
53 14 12 74
54 12 11 77
> = 55 10 10 80

So you can see here that from Age 18 - 35 allocation of investment to equity (Asset class E) is fixed at 50%, corporate bonds (Asset class C) is fixed at 30% and government securities (Asset class G) is fixed at 20%. Once you reach 35, at every birth date allocation to E type will reduce by 2% and allocation to C type will reduce by 1% per year while the allocation to government securities will increase by 3% every year. This automatic shift will continue till the investor age is 55, by that time the allocation to E, C and G would have become 10%, 10% and 80% respectively. After that it continues the same way till the age of 60.

Switching between active and auto choice

Switching between the active and auto choice is permitted but can be done only once in a year. The subscriber has to submit the physical application form (Form-UOS-S3/CS-S3) to change Scheme Preference. A subscriber under the Corporate model can exercise this option only if the option has been provided to the subscriber by the Corporate. But such changes can be done only once in a financial year. In case the Subscriber wants to change Scheme Preference for both the Tiers then the Subscriber should submit separate forms for each Tier. The subscriber can submit the request to his / her POP/POP-SP through whom the subscriber has opened the NPS account. Please collect a 17 digit acknowledgement number against your request.

Note one more thing here - For government employees central/state, the contribution of all the Subscribers is invested in the default scheme (If they opt for Auto choice). In the default scheme, the contribution is allocated to three PFMs, viz. SBI Pension Funds Private Limited, UTI Retirement Solutions Limited and LIC Pension Fund Limited in a predefined proportion and each of the PFMs will invest the funds in the proportion of 85% in fixed income instruments and 15% in equity and equity related instruments. Scheme Preference change option is not available to Govt. subscribers for Tier I.

That's all for this topic National Pension System(NPS) investment choices - Active or Auto. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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  2. Tax exemption benefits of National Pension System(NPS)
  3. EPF Vs NPS: Which is better
  4. EEE EET ETE explained

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Sunday, 17 April 2016

National Pension System(NPS)

The idea of pension plan is to provide financial security and stability during old age when people don't have a regular source of income. Pension plans give an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.

Rising cost of living and health costs, inflation and life expectancy make retirement planning essential part of today's life. Thus the Government of India has started the National Pension System in order to provide social security to more citizens.

Who is eligible to open NPS account

National Pension Scheme (NPS) was started by the Government of India for the benefit of the government employees in the year 2004 because government then decided not to give pension from its own sources to its new employees.

With effect from 1st May, 2009 NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis. So now in addition to the government employees and employees of statutory corporations any other person whether employed in private sector or self-employed or businessman or a housewife can join NPS for his future financial security.

The basic purpose of this scheme is to create a pensioned society by providing a source of income for all in old age.

Age eligibility

Individuals who are aged between 18 - 60 years as on the date of submission of his/her application to the POP/ POP-SP. No entry is allowed after attaining age of sixty years. You will not be even permitted to make further contributions to the existing NPS accounts after attaining age of sixty years

Can NRI open NPS account

Yes, a NRI can open an NPS account. Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time. If the subscriber's citizenship status changes, his/ her NPS account would be closed.

How and where to open NPS account

NPS is distributed through authorized entities called Points of Presence (POP's) and almost all the banks (both private and public sector) are enrolled to act as Point of Presence (POP) under NPS apart from several other financial institutions.

These entities have authorized some of their branches to act as collection points and extend a number of customer services to NPS subscribers and these branches are called Point of Presence Service Providers (POPSPs).

To locate the nearest POPSP you can visit https://www.npscra.nsdl.co.in/pop-sp.php

You need to submit the filled NPS subscriber registration form (PRAN application form) at any of the POP along with other documents for the purpose of KYC documentation with respect to proof of identity and proof of address.

You have to ensure that your PRAN application form is filled up properly with all the details like - photograph, signature, mandatory details, scheme preference details(in case of active choice) etc.

Note that ultimately any request for opening/withdrawal will go to Central Recordkeeping Agency (CRA) for registration.

Required documents

  • Completely filled in subscriber registration form
  • Proof of Identity
  • Proof of Address
  • Age/date of birth proof

Nomination Facility

You need to appoint a nominee at the time of opening of a NPS account in the prescribed section of the opening form. You can appoint up to 3 nominees for your NPS Tier I and NPS Tier II account. You have to specify the percentage of your saving that you wish to allocate to each nominee. The share percentage across all nominees should collectively aggregate to 100%.

If you have not made the nomination to your NPS account at the time of registration, you can do the same after the allotment of PRAN. You will have to visit your PoP and place Service Request to update nominations details.

Permanent Retirement Account Number (PRAN)

Every individual subscriber is issued a Permanent Retirement Account Number (PRAN) card, which has a 12 digit unique number, after the subscriber application is processed. For any further service request PRAN as reference would be required.

Types of NPS accounts

Under NPS two types of accounts are available -

  • Tier-I - This is a non-withdrawable account (though now withdrawal of certain percentage is permitted if you fulfil the criteria) where the individual contribute his savings along with the contribution from his employer. Tier I account is mandatory.
  • Tier-II - This is a voluntary savings facility available as an add-on to any Tier-1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish. Two important things to note here are -
    • Having a Tier-I account is mandatory for opening a Tier-II account.
    • Tier-II account is for your own saving so there won't be any employer contribution in Tier-II accout.

Swavalamban Scheme or NPS lite

To provide social security for people in unorganised sector Govt has initiated Swavalamban Scheme. It will be applicable to all citizens in the unorganised sector who join the New Pension System (NPS).

Under the scheme Government will contribute Rs. 1000 per year to each NPS - Swavalamban account opened in year 2010-2011, 2011-2012, 2012-2013 for five years as under.

  • Account opened in 2010-2011 will get the benefit till 2014-2015
  • Account opened in 2011-2012 will get the benefit till 2015-2016
  • Account opened in 2012-2013 will get the benefit till 2016-2017

Swavalamban account opened in the period 2013-2014 to 2016-2017 will get the Swavalamban benefit up to 2016-17. This incentive is available till FY 2016-17 and may be extended thereafter.

The benefit will be available only to persons who join the NPS with a minimum contribution of Rs. 1,000 and maximum contribution of Rs. 12,000 per annum.

Investment choices under NPS

NPS offers two approaches to invest your money -

  • Active choice - Here you will decide on the asset classes where the funds are to be invested and their percentage. Note here that in Equity contribution percentage can't go beyond 50%. Other asset classes are government securities and corporate bonds. These assets are referred as E, C and G.
  • Auto choice - For those participants who do not have the required knowledge to manage their NPS investments there is "auto choice" option. In this option the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio.
    At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in E Class, 30% in C Class and 20% in G Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in E and C asset class will decrease annually and the weight in G class will increase annually till it reaches 10% in E, 10% in C and 80% in G class at age 55.

Minimum and maximum annual contribution

Unlike PPF, in NPS there is no maximum amount restriction per annum but there are restrictions on the minimum contribution for both Tier-I and Tier-II accounts.
Tier-I Tier-II
Minimum Contribution at the time of account opening Rs. 500 Rs. 1000
Minimum amount per contribution Rs. 500 Rs. 250
Minimum total contribution in the year Rs. 6000 Rs. 2000
Minimum frequency of contributions 1 per year 1 per year

Tax benefits

There are three ways tax deduction can be claimed by investing in the NPS

  • The amount you invest in NPS will be eligible for deduction under Sec 80CCD(1). Remember that this deduction comes under the current overall deduction limit of 1.5 lakhs (FY16-17).
  • Under Section 80CCD (2) the contribution made by your employer is also eligible for tax deduction. Great thing is that it will not be subject to the limit specified in Section 80CCE but it is capped to 10% of Basic + DA maximum.
  • If you have other investments like EPF, PPF and Life insurance premium that exhaust the 80C limit of 1.5 lakhs, don't worry you can still claim deduction for NPS. From FY2015-16 additional deduction of up to Rs 50,000 is available under the Sec 80CCD(1b). This is over and above the Limit of 1.5 lakhs in 80C.

Note that tax benefits are available only in the case of Tier I account not in Tier II account.

Withdrawal rules or Tax treatment of NPS

NPS enjoys Exempt, Exempt and Tax (EET partial) status from income tax point of view. Income accrued to the NPS account is not taxable in the hands of the subscriber. Post retirement (after the age of sixty) withdrawal from NPS is tax free to the limit of 40% of account balance.

Minimum 40% of the NPS corpus needs to be mandatorily utilized for purchase of annuity. Rest 20% can either be withdrawn in lump sum or can be utilized for purchase of annuity. If withdrawn lump sum it is taxed at applicable tax rate. Note that one can defer the withdrawal of the eligible lump sum amount payable under NPS till the age of 70 years that way one can lower the tax liability.

Also note that a subscriber at the time of attaining the age of 60 years can purchase annuity up to 100% of his accumulated pension wealth. If the Corpus is less than or equal to Rs.2 lakhs, there is no need to invest into Annuity. Entire amount can be withdrawn in lump sum

If withdrawn before the age of sixty due to loss of employment or incapability only 20% of lump sum withdrawal is tax free. In this case at least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity providing for the monthly pension of the subscriber. If the Corpus is less than or equal to Rs.1 lakh, there is no need to invest into Annuity. Entire amount can be withdrawn in lump sum

Partial Withdrawal from NPS

Subscriber can withdraw up to 25% of contributed amount towards Tier - I NPS Account after 10 years. Additionally, Subscriber is allowed to withdraw from Tier I NPS account twice after a gap of 5 years after first withdrawal. Withdrawal from Tier - I NPS account would be permitted for specific purposes like Child's marriage, higher education, treatment of critical illnesses etc.

Choice of Fund Managers

NPS offers a choice of Pension fund managers.

The subscribers can choose between 8 Fund Managers namely-

  • ICICI Prudential Pension Fund Management Co. Ltd.
  • HDFC Pension Management Co. Ltd.
  • Kotak Mahindra Pension Fund Ltd.
  • LIC Pension Fund Ltd.
  • Reliance Capital Pension Fund Ltd.
  • SBI Pension Funds Pvt. Ltd
  • UTI Retirement Solutions Ltd
  • Pension Fund (PF) to be incorporated by Birla Sunlife Insurance Co. Ltd

Note that the list may change so please check the current list of fund managers.

One Fund Manager must compulsorily be selected. You can switch from one fund manager to another, subject, of course, to certain regulatory restrictions

Annuity Service Providers

  • Life Insurance Corporation of India
  • SBI Life Insurance Co. Ltd.
  • ICICI Prudential Life Insurance Co. Ltd.
  • Bajaj Allianz Life Insurance Co. Ltd.
  • Star Union Dai-ichi Life Insurance Co. Ltd.
  • Reliance Life Insurance Co. Ltd.
  • HDFC Standard Life Insurance Co. Ltd.

Note that the list may change so please check the current list of Annuity service providers.

Different types of annuities

The following are the generic annuities that are offered by Annuity Service Providers to the subscribers of NPS. However, some of the ASP's may offer some variants which have slightly different or combination type of annuities.

  • Pension (Annuity) payable for life at a uniform rate to the annuitant only.
  • Pension (Annuity) payable for 5, 10, 15 or 20 years certain and thereafter as long as you are alive.
  • Pension (Annuity) for life with return of purchase price on death of the annuitant (Policyholder).
  • Pension (Annuity) payable for life increasing at a simple rate of 3% p.a.
  • Pension (Annuity) for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
  • Pension (Annuity) for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
  • Pension (Annuity) for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant and with return of purchase price on death of the spouse. If the spouse predeceases the annuitant, payment of annuity will cease after the death of the annuitant and purchase price is paid to the nominee

Points to note

  • Joint accounts are not permitted under NPS, only an individual can open NPS account.
  • Multiple NPS accounts for a single individual are not allowed.
  • There are two types of NPS accounts Tier-I and Tier-II.
  • At present, a subscriber cannot avail a loan against his/her NPS holdings.
  • NPS offers two choices of investment Auto choice and Active choice.
  • Exposure to equity cannot go beyond 50% under any of the two choices.
  • After retirement (at the age of 60) 40% of the accumulated corpus has to be used in buying an annuity.
  • If retiring before the age of 60 and want to withdraw the accumulated NPS corpus in that case at least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity.

That's all for this topic National Pension System(NPS). If you have any doubt or any suggestions to make please drop a comment. Thanks!


Related Topics

  1. EPF Vs NPS: Which is better
  2. National Pension System(NPS) investment choices - Active or Auto
  3. Tax exemption benefits of National Pension System(NPS)
  4. EEE EET ETE explained

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>>>Go to Pension Plans page

Tuesday, 5 April 2016

EPF Vs NPS: Which is better

Employees Provident Fund (EPF) Taxation issue raised by the Finance Bill, 2016 is over now. The government ultimately withdrew the provision relating to taxing sixty per cent of the amount when withdrawn by an employee from his EPF account.

The basic purpose of introducing this provision was to bring similarity in EPF and NPS taxation provisions. At present EPF falls under exempt, exempt, exempt (EEE) category while National pension Scheme(NPS) falls under exempt, exempt, tax (EET) category.

Simply stating, both EPF and NPS qualify for income tax exemption at the time of contributing money to the respective funds as well as at the time of accrual of income to the fund deposits. But at the time of making withdrawals from the funds existing income tax provisions are different for the two.

Withdrawal in lump sum from NPS after attaining the age of sixty is allowed to the extent of sixty per cent of the total corpus at the credit of the NPS subscriber. Minimum forty percent of the credit balance is to be utilized compulsorily for purchase of monthly pension/annuity to the subscriber. One hundred per cent cash withdrawal is not allowed. Lump sum cash withdrawal from NPS before the age of superannuation is restricted to twenty percent only rest eighty per cent is to be utilized for purchase of monthly annuity/pension.

Lump sum cash withdrawal from EPF account at the time of retirement is allowed to any extent as per existing law. However, an employee can withdraw his fund (EPF) even before the date of superannuation in case of loss of his employment after a waiting period of two months or in case of medical emergency or for children education or marriage of children.

Some background on NPS

National Pension System(NPS) was started by the Government of India for the benefit of the government employees in the year 2004 because government then decided not to give pension from its own sources to its new employees. In the year 2009 this scheme was open for general public also and now, in addition to the government employees and employees of statutory corporations any other person whether employed in private sector or self-employed or businessman or a housewife can join NPS for his future financial security. The basic purpose of this scheme is to create a pensioned society by providing a source of income for all in old age. This is a good scheme but due to some reasons this could not catch fancies of the public.

Some background on EPF

EPF is for the workers employed in organized sector where both employers and employees contribute to the fund which is managed by the Employees Provident Fund Organization (EPFO). The corpus is invested mainly in fixed income securities and interest is credited annually to the employees account at a fixed rate decided every year by the EPFO Board. There is made no discrimination in between old and new fund accounts in matters of income distribution. Interest is credited at even rate to all EPF accounts.

Let us now understand the difference between an EPF account and a NPS account from the point view of eligibility, investment criteria and taxation etc.:

Differences between EPF and NPS

Basis of distinction EPF NPS
Eligibility and purpose of joining Only organized sector employees can become member of EPF by virtue of the provisions of EPF ACT. All establishments where 20 or more workers are employed on regular basis are required to offer benefits of EPF to their employees. Any employee whose basic salary is up to Rupees 15,000 has to be mandatorily offered the benefit of EPF. However, the Act does not prohibit the employers from offering this benefit to the employees drawing higher salaries.

The basic purpose of this scheme is to create retirement fund and, in addition, provide post retirement pension to the employees.

NPS is primarily for the government employees appointed after discontinuance of government pension in 2004. NPS is mandatory For the central government, many state governments' employees since 2004. After 2010 it is mandatory for PSU banks employees.

After amendment in the scheme in 2009 now any Indian citizen, including the above, can join the scheme and contribute to it to avail old age benefits in the form of annuities. The minimum age of entry is 18 years. No entry is allowed after attaining age of sixty years.

The purpose of this scheme is to provide a facility of savings for old age to all Indian citizens and provision of old age pension as well.

Mode of opening and operating account In case of EPF an eligible employee has to make no efforts to join the fund. It is obligatory on the employers to take the requisite steps to ensure that all the eligible employees become member of EPF. The contribution of an employee is compulsorily deducted @12% of basic salary from his monthly salary and deposited by the employer to his fund account. The employer also makes a matching contribution to the employee's fund. The employees themselves have to do nothing to make deposits in EPF.

An employee cannot open EPF account but with the help of Universal Account Number he can operate it online. It is possible to transfer the account after change of job.

Joining NPS is purely voluntary for a person not being government and public sector companies including PSU banks' employees. Any eligible person can open his account as per scheme drawn by the Pension Fund Regulatory and Development Authority (PFRDA) through a Point of Presence (POP) to take advantage of the scheme. The subscribers themselves have to open their NPS accounts and deposit their contributions to the scheme like, they deposit their PPF subscriptions. An EPF/PPF account holder can also open NPS account.

Online opening and operation of NPS account is possible.

Mode of Investment Mandatory amount of subscription is 12% of basic salary plus employer's share at equal rate. However, employee himself can contribute a higher amount to his EPF account. In the case central government, state governments' and PSUs employees both the employees and the employers contribute @ 10% of the basic salary to the NPS account.

In rest of the cases subscription to the scheme can be made for a minimum sum of Rupees six thousand per year or Rupees five hundred per month. There is no upper limit for deposit. Minimum of one subscription of Rupees six thousand in a year is compulsory. Minimum amount of a subscription is Rupees five hundred. Regular monthly contribution to NPS is not mandatory.

Tax treatment EPF enjoys Exempt, Exempt and Exempt status from income tax point of view. The employers' contribution to EPF is not taxable. Employees own contribution to the fund qualifies for deduction to the extent of Rupees one lakh fifty thousand u/s 80C of Income Tax Act comprising of EPF contribution of the employee, insurance premiums paid, children education (tuition) fee, PPF contribution, etc. while computing taxable income. (A.Y. 2016-17 & A.Y.2017-18)

Interest credited to the account and withdrawal after five completed years of service from EPF account is also exempted from tax. After retirement the employee can withdraw entire corpus in lump sum without any tax liability.

NPS enjoys Exempt, Exempt and Tax (partial) status from income tax point of view. For NPS subscriptions an additional deduction of Rupees fifty thousand is allowed u/s 80CCD of the Act. NPS contribution of an assessee is first allowed u/s 80C within limit of Rupees one lakh fifty thousand. NPS contribution if not covered fully under this section then the above mentioned additional limit will be utilized. This way one can take advantage of additional tax deduction by subscribing to NPS if the limit of deduction u/s 80C has exhausted.

Income accrued to the NPS account is not taxable in the hands of the subscriber. Post retirement (after the age of sixty) withdrawal from NPS is tax free to the limit of 40% of account balance. Minimum 40% of the NPS corpus needs to be mandatorily utilized for purchase of annuity. Rest 20% can either be withdrawn in lump sum or can be utilized for purchase of annuity. If withdrawn lump sum it is taxed at applicable tax rate. If withdrawn before the age of sixty due to loss of employment or incapability only 20% of lump sum withdrawal is tax free. In this case 80% of the fund balance needs to be invested for grant of annuity.

Asset allocation By the recent past, EPF corpus was invested totally in debt instruments and these were insulated from wild fluctuations of stock market. Off late, decision was taken to invest 5% to 15% of yearly contribution in equity market through ETF. The fund is managed by a trust working under EPFO. A NPS subscriber has the liberty to choose his fund manager from the given panels of fund managers. He also has the right to decide the ratio of equity and debt investments. As default option maximum fifty percent contribution is invested in equity and rest in debt instruments. The ratio of equity investment reduces with every passing year as per scheme of default option.
Return During the past ten years return from EPF has been increasing marginally. For the past financial year (2014-15) it was 8.75% and for the current financial year it will be 8.8%. Returns of NPS are subject to portfolio mix (ratio of debt and equity investment) decided by the subscriber. If stock market does not show much vitality it is expected to be yield more than 10% per annum for 40% equity and 60% debt investment portfolio.

Note that the above mentioned rules and details relating to NPS are in relation to tier I account only. Where an NPS account is opened through an employer (Government, PSU or Corporation) it is always a tier I account meant for post-retirement provisions. This is a non-withdrawable account. Money cannot be withdrawn before retirement/cession of service or death of the employee.

Tier II account can be opened by an individual directly. Tier II NPS account is withdrawable saving account with no tax benefits where money can be withdrawn at any time without any of the aforesaid limits.

That's all for this topic EPF Vs NPS: Which is better. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Sunday, 27 March 2016

Crorepati farmers: tax them please!

This year's (2016) budget has been termed as a pro-rural budget which has an ambitious plan of doubling the farmer's income by year 2022. Almost everybody would agree that these steps were long due in a country where agriculture is one of the most important industries. Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry and fisheries accounted for 13.7% of the GDP (gross domestic product) in 2013 and about 50% of the workforce.

And also let's not forget the plight of the farmers where

  • Farmers are committing suicide as they are not able to recover even their initial investments and plunging into debt.
  • Forced to deal with the 'middle man'.
  • End up receiving meager (leaking) subsidies.

It is an established fact that farmers in India are in poor condition with very low income. Going by that fact, it was very much surprising to know that we also have a section of farmers who are earning in Crores and not paying any taxes.

Agricultural income is tax exempt

In India agricultural income is exempt from tax and it is not even added to your taxable income if you have income from other sources. Some people are taking advantage of this exemption.

CBDT (Central Board of Direct Taxes) enquiry

Drawing reference from the PIL in Patna high court CBDT has asked its officials to verify the genuineness of agricultural income claims exceeding Rs 1 crore made by taxpayers in their income-tax (I-T) returns.

As per TOI report, tax exemption on agricultural income, as declared by taxpayers in their IT returns filed up to November 2014 in the financial year 2013-14 was Rs. 9,338 crore.

Source : http://timesofindia.indiatimes.com/business/india-business/As-crorepati-farmers-mushroom-tax-officials-go-digging-for-evasion/articleshow/51377186.cms

News Nation has made even higher claims -

"The channel got hold of an RTI reply which throws light on the dark world of corruption and fraud in agriculture sector. In 2011-12 nearly 6.50 lakh farmers earned Rs 2 thousand lakh crore (approx) which was much more than the annual GDP of the entire country."

Source : http://www.newsnation.in/article/121125-news-nation-disclosure-on-blackmoney-kharabpati-farmers-take-agriculture-route-t.html

This information gives rise to a very vallid question

  • Is it a good policy to keep all agricultural income as tax free?
  • What is the problem in applying the income tax slabs as applicable to other sectors, be applicable to agricultural income too?

If a person has multiple sources of income, one being Agricultural Income, then that person has an undue advantage as all of that agricultural income will be tax free. It is not a far-fetched notion but a very realistic scenario. Now-a-days with the vast changes and improvements across all industries and sectors in India, we see many people moving to the cities from villages and pursuing the career of their choice. And most of them still hold-on to their agricultural lands with income being generated from it. Does it make sense to let them have all that income as tax-free?

Contrast it to a person who is living in the city and having a day job and he/ she also works part time in the evening to get some extra income. He/ She is supposed to pay tax on the total income whether it has single or multiple sources. Is that not being unfair?

It can be argued that agriculture is fraught with uncertainties and should be handled differently, with maybe, some special concessions. As in India, the famers depend mostly on the Monsoons. But the uncertainty is evident in every Sector. May not be one dependent on the Nature.
Let's say a middle class salaried person buys a house availing a loan of 35Lakhs from a Bank and he/ she loses the job in next 6 months. So, this job is also an uncertainty. Nobody can take his/ her job for granted or secure it forever.

Same holds true for a Business too. A business is always on an uncertain footing. You don't make profits (or losses) all the time that you are in a business. Yet, businessmen are supposed to pay taxes.
In fact any govt. Trying to do anything for the businessmen will be demonized and hounded as a pro-business, pro-rich Government. It will, for sure, have to suffer the unending taunts and tags from not only the Opposition but from almost everyone else too.

So, would it not be a rational move to bring rich farmers in the tax ambit too. Instead of making it totally tax-free, the Govt. can maybe create separate slabs for Agricultural income. Like, let's say up to 7.5 lakhs is tax free if it is completely from agricultural income and the rest is taxable.

That's all for this topic Crorepati farmers: tax them please!. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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Tuesday, 22 March 2016

Post Office Monthly Income Scheme

Most of the people, mostly in urban areas, if asked about money and post office will think of money order or at most National Saving Certificate(NSC). But Indian post offices provide a lot of other options to invest your money.

Apart from banks; Public Provident Fund, Sukanaya Samriddhi Yojana account and KVP can be opened in post offices too.

There are other investment schemes too which are specific to post office like NSC, Senior Citizen Savings Scheme (SCSS) account, Monthly Income Scheme (MIS) account. This post is to give information about Monthly Income Scheme.

Post Office Monthly Income Scheme

Monthly Income Scheme an investment scheme from Indian Post provides fixed monthly income at the given rate of interest (8.4% in FY 2015-16, 7.8% from April 1, 2016). It is a good scheme for risk-averse investors who want fixed income free from any fluctuations.

It is ideally suited for senior citizens and retired people who have got some lump-sum amount after retirement. A portion of that amount can be invested in monthly income scheme to get monthly payments. You have to compare it with quarterly interest paying fixed deposits to see which gives better return.

Opening Monthly Income Scheme (MIS) account

Account may be opened by individual. Joint account is also permitted and can be opened by two or three adults. In case of joint account all joint account holders have equal share in each joint account.

Also single account can be converted into Joint and Vice Versa.

Account can be opened by cash/cheque and in case of cheque the date of realization of cheque in Govt. account shall be date of opening of account.

Required documents

At the time of opening POMIS you need to submit -

  • Filled account opening form (provided by post office where you are opening the account).
  • Copy of the address proof and identity proof like (passport/PAN card/ration card/voter identity card).
  • Two passport size photographs.

You need to take the originals with you for verification.

Eligibility for opening MIS account

Monthly income scheme is only for Resident Indians, NRIs can't invest in it.

Account can be opened in the name of minor and a minor of 10 years and above age can open and operate the account.

Minor after attaining majority has to apply for conversion of the account in his name.

Minimum and maximum limit on investment

Investment should be in multiples of INR 1500/- with maximum investment limit as INR 4.5 lakhs in single account and INR 9 lakhs in joint account.

Remember that an individual can invest maximum INR 4.5 lakh in MIS (including his share in joint accounts)

For calculation of share of an individual in joint account, each joint holder have equal share in each joint account.

Interest rate

As per recent announcement from 1-4-2016, interest rate is going to be 7.8% per annum payable monthly.

Till 31-03-2015, interest rate is 8.40% per annum payable monthly.

So let's see an example with the interest rate as 7.8%.

If you have invested Rs. 1,50,000 (Rs. 1.5 Lakhs) in the POMIS then with annual interest rate as 7.8% annual interest income is - Rs. 11,700

So monthly pay-out would be - Rs. 975

With interest rate as 8.4% it was Rs. 1050.

Interest can be drawn through auto credit into savings account standing at same post office, through PDCs or ECS./In case of MIS accounts standing at CBS (Core Banking Solution) Post offices, monthly interest can be credited into savings account standing at any CBS Post offices.

Tax on MIS

Post office monthly income scheme is not eligible for deduction under Sec 80C.

Also note that amount received as monthly income from this scheme will be added to your income and taxed according to the slab you fall in.

Point to note here -

  • If you are not withdrawing the monthly pay-outs, that amount does not yield any interest.
  • There is no TDS on the Post Office MIS, as mentioned above interest income is taxable in your hands.

Maturity

Maturity period is 5 year.

Pre-mature closure

Can be prematurely en-cashed after one year, rule is as

  • After one year but before 3 years at the discount of 2% of the deposit
  • and
  • After 3 years at the discount of 1% of the deposit.

Here discount means deduction from the deposit.

Transferable

Account can be transferred from one post office to another.

Nomination Facility

Nomination facility is available at the time of opening the MIS account. You can also do the nomination after opening of account.

Bonus

Giving bonus at the time of maturity is discontinued.

There was a bonus of 5% on principal amount at the time of maturity of MIS accounts opened on or after 8- 12-07 and up to 30-11-2011. No bonus is payable on the deposits made on or after 1-12-2011.

That's all for this topic Post Office Monthly Income Scheme. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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