Personal Finance

Showing posts with label Pension plans. Show all posts

Friday, 9 February 2018

Pradhan Mantri Vaya Vandana Yojana - PMVVY

GOI has launched the Pradhan Mantri Vaya Vandana Yojana (PMVVY) with an aim to provide regular and assured pension to senior citizens. Because of the advantage of assured pension, PMVVY scheme shields the senior citizens against a future fall in their interest income due to uncertain market conditions.

PMVVY launch and end dates

Pradhan Mantri Vaya Vandana Yojana was launched on 4th May, 2017 and initially meant to be available for one year from launch date i.e. 3rd May, 2018. In Budget, 2018 it is proposed to extend PMVVY scheme till March, 2020.

Eligibility for PMVVY

Pradhan Mantri Vaya Vandana Yojana is available to all citizens of India aged 60 years and above. So minimum age to enter this scheme is 60 years, there is no maximum age for entry though.

How to purchase PMVVY

LIC of India is managing this scheme so it can be purchased only through LIC. PMVVY scheme can be purchased both offline or online. If you wish to purchase the scheme online you can do it by log in LIC website – www.licindia.in.

PMVVY duration and pension options

PMVVY policy term is 10 years, so you will get pension for 10 years from the date of purchase.

Options for the frequency when the pension is paid are-

monthly
quarterly
half yearly
yearly

The pension payment shall be through NEFT or Aadhaar Enabled Payment System.

PMVVY purchase price and pension amount

As per the current structure minimum and maximum amount of pension you can get under PMVVY is Rs. 1000 and Rs. 5000.

The minimum and maximum purchase price under different modes of pension will be as under:

Mode of Pension	Minimum Purchase Price	Maximum Purchase Price
Yearly	Rs. 1,44,578/-	Rs. 7,22,892/-
Half-yearly	Rs. 1,47,601/-	Rs. 7,38,007/-
Quarterly	Rs. 1,49,068/-	Rs. 7,45,342/-
Monthly	Rs. 1,50,000/-	Rs. 7,50,000/-

So you can see the maximum amount you can invest is Rs. 7,50,000 as per current structure.

The purchase price has to be paid lump sum. The scheme is exempted from Goods and Services Tax (GST).

Note that Budget, 2018 proposed to increase the PMVVY investment limit from 7.5 Lakhs to 15 Lakhs, correspondingly maximum pension amount will also increase to Rs. 10,000 monthly.

Note that total amount of pension under all the policies allowed to a family under this plan shall not exceed the maximum pension limit. The family for this purpose will comprise of pensioner, his/her spouse and dependents.

Sample Pension rates

For calculation of pension you will get for the invested amount, you can use the following sample pension rates.

The pension rates for Rs.1000/- Purchase Price for different modes of pension payments are as below:

Yearly: Rs. 83.00 p.a.
Half-yearly: Rs. 81.30 p.a.
Quarterly: Rs. 80.50 p.a.
Monthly: Rs. 80.00 p.a.

So you can calculate that for getting Rs. 1,20,000 pension yearly (With new limit) you need to invest Rs. 14,45,783.

Interest rate

The biggest draw of the PMVVY is the assured return. Based on the above figures you can see that the return you get for monthly pension is 8% where as for yearly pension it is 8.3%. For quarterly it will come to 8.05% and half yearly pension interest rate is 8.13%.

Tax on PMVVY

There is no tax benefit available on the invested amount. On the contrary pension amount you get is taxable. The pension amount is added to your yearly income and taxed as per the applicable slab.

Only tax relief you get is that the scheme is exempted from Goods and Services Tax (GST).

Pradhan Mantri Vaya Vandana Yojna Benefits

Pension payments – Pensioner will get the pension amount for the policy term of 10 years. The pension amount received and the frequency depends on the chosen amount (Rs. 1000 – Rs. 5000, will increase to Rs. 10,000 as per budget, 2018 announcement) and frequency (Monthly, quarterly, half-yearly, yearly).
In case of death of the subscriber – In case of death of the policy holder during the policy term of 10 years, the purchase price shall be refunded to beneficiary.
Maturity benefit - On survival of the subscriber to the end of the policy term of 10 years, purchase price along with final pension instalment shall be payable to the policy holder.

Pre-mature exit from PMVVY

You can pre-maturely exit from PMVVY during the policy term under exceptional circumstances like the pensioner requiring money for the treatment of any critical illness of self or spouse. The Surrender Value payable is 98% of purchase price in such cases.

Loan from PMVVY

You can apply for loan after completion of 3 policy years. The maximum loan that can be granted shall be 75% of the purchase price. The rate of interest to be charged for loan amount shall be determined at periodic intervals. For the loan sanctioned in Financial Year 2016-17, the applicable interest rate is 10% p.a. payable half-yearly for the entire term of the loan.

Should you opt for PMVVY

Based on the information provided you can make an informed decision whether it is a good scheme for you. To summarize let’s try to put the bad points and good points in black and white.

Good points-

Assured pension, provides a regular, fixed source of income with no risk of fluctuations.
Backed by Government of India.
Provides an assured return of 8% to 8.3% depending on the frequency.
Provides option for taking loan or surrendering the policy in exceptional circumstances.
Provides an option to invest your retirement corpus for regular income. Proposal to increase investment limit to Rs. 15 lakhs brings the scheme at par with another investment scheme, Senior Citizen Saving Scheme (SCSS). So there are two options for senior citizens to get assured returns.

Bad points-

Amount of pension is low, maximum is Rs. 5000 monthly (May increase to Rs. 10,000 as per the proposal in budget, 2018).
Rate of return is fixed, if rates start moving upward in near future that will result in a loss.
Income is taxable.

That's all for this topic Pradhan Mantri Vaya Vandana Yojana - PMVVY. If you have any doubt or any suggestions to make please drop a comment. Thanks!

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>>>Go to Pension Plans Page

Thursday, 8 February 2018

Atal Pension Yojana - APY

Atal Pension Yojana (APY) is a pension scheme open to all citizens of India with main focus on unorganized sector workers. Since unorganized sector workers are not covered under any social security scheme, APY scheme is started to help them to save money for the old age.

The biggest draw of Atal Pension Yojana is the guaranteed minimum pension at the age of 60 years based on the opted amount and the contribution by the subscriber. APY is administered by the Pension Fund Regulatory and Development Authority (PFRDA).

Eligibility for APY

Any citizen of India can subscribe to APY scheme. The eligibility criteria that you must fulfill is as follows-

You should be between 18 and 40 years of age.
You should have a saving bank account. If you don’t have a bank account then you need to open one.
You should have a mobile phone and the number of your mobile should be registered with your bank account.

Pension amount received under APY

One of the biggest advantage of APY is the guaranteed minimum pension. Based on your contribution you will get a guaranteed minimum pension of Rs 1,000/-, 2,000/-, 3,000/-, 4,000 and 5,000/- per month after the age of 60 years.

Here note that the minimum pension is guaranteed by the government so the amount you opted for will definitely be given to you as pension. However, if higher investment returns are received on the contributions of subscribers of APY, higher pension would be paid to the subscribers.

Monthly contribution in APY

As already stated minimum age to subscribe to APY is 18 and maximum is 40 years. You need to contribute till the age of 60. So sooner you start less you need to pay as premium.

You premium also depends upon the pension amount you opt for out of Rs. 1000, 2000, 3000, 4000 or 5000 per month.

Here is a table courtesy PFRDA - http://pfrda.org.in//MyAuth/Admin/showimg.cshtml?ID=760 which shows the monthly, quarterly or half yearly contribution based on age.

		Minimum Guaranteed Pension of Rs. 1000/month			Minimum Guaranteed Pension of Rs. 2000/month			Minimum Guaranteed Pension of Rs. 3000/month			Minimum Guaranteed Pension of Rs. 4000/month			Minimum Guaranteed Pension of Rs. 5000/month
Return of corpus amount to the nominee		Rs. 1.70 Lakh			Rs. 3.40 Lakh			Rs. 5.10 Lakh			Rs. 6.80 Lakh			Rs. 8.50 Lakh
Age at entry	Vesting period	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment	Monthly instalment	Qaurterly instalment	Half yearly instalment
18	42	42	125	248	84	250	496	126	376	744	168	501	991	210	626	1239
19	41	46	137	271	92	274	543	138	411	814	183	545	1080	228	679	1346
20	40	50	149	295	100	298	590	150	447	885	198	590	1169	248	739	1464
21	39	54	161	319	108	322	637	162	483	956	215	641	1269	269	801	1588
22	38	59	176	348	117	349	690	177	527	1045	234	697	1381	292	870	1723
23	37	64	191	378	127	378	749	192	572	1133	254	757	1499	318	948	1877
24	36	70	209	413	139	414	820	208	620	1228	277	826	1635	346	1031	2042
25	35	76	226	449	151	450	891	226	674	1334	301	897	1776	346	1121	2219
26	34	82	244	484	164	489	968	246	733	1452	327	975	1930	409	1219	2414
27	33	90	268	531	178	530	1050	268	799	1582	356	1061	2101	446	1329	2632
28	32	97	289	572	194	578	1145	292	870	1723	388	1156	2290	485	1445	2862
29	31	106	316	626	212	632	1251	318	948	1877	423	1261	2496	529	1577	3122
30	30	116	346	685	231	688	1363	347	1034	2048	462	1377	2727	577	1720	3405
31	29	126	376	744	252	751	1487	379	1129	2237	504	1502	2974	630	1878	3718
32	28	138	411	814	276	823	1629	414	1234	2443	551	1642	3252	689	2053	4066
33	27	151	450	891	302	900	1782	453	1350	2673	602	1794	3553	752	2241	4438
34	26	165	492	974	330	983	1948	495	1475	2921	659	1964	3889	824	2456	4863
35	25	181	539	1068	362	1079	2136	543	1618	3205	722	2152	4261	902	2688	5323
36	24	198	590	1169	396	1180	2337	594	1770	3506	792	2360	4674	990	2950	5843
37	23	218	650	1287	436	1299	2573	654	1949	3860	870	2593	5134	1087	3239	6415
38	22	240	715	1416	480	1430	2833	720	2146	4249	957	2852	5648	1196	3564	7058
39	21	264	787	1558	528	1574	3116	792	2360	4674	1054	3141	6220	1318	3928	7778
40	20	291	867	1717	528	1734	3435	873	2602	5152	1164	3469	6869	1454	4333	8581

Procedure for opening APY account

Since it is required to have a bank saving account for opening APY account so you need to approach the bank branch where you have an account or you can open a bank account.

Then fill up the APY registration form. Also register your mobile number/Aadhaar.

Each subscriber will be provided with an acknowledgement slip after joining APY which would invariably record the guaranteed pension amount, due date of contribution payment, PRAN etc.

A subscriber can open only a single APY account.

Co-contribution by the government

As an incentive to increase participation to APY government decided to co-contribute 50% of the total contribution or Rs. 1,000/- per annum, whichever is lower, to the eligible APY account holders who join the scheme during the period 1st June, 2015 to 31st December, 2015.The Government co-contribution will be given for 5 years from FY 2015-16 to 2019-20.

Eligibility for co-contribution by the government

In case you are wondering why you didn't get any co-contribution from the govt. they you must know that only those individuals are eligibe for co-contribution by the givt. who are not covered by any Statutory Social Security Schemes and are not income tax payers.

For example, members of the Social Security Schemes under the following enactments would not be eligible to receive Government co-contribution:

Employees’ Provident Fund & Miscellaneous Provision Act, 1952.
The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948.
Assam Tea Plantation Provident Fund and Miscellaneous Provision, 1955.
Seamens’ Provident Fund Act, 1966.
Jammu Kashmir Employees’ Provident Fund & Miscellaneous Provision Act, 1961.
Any other statutory social security scheme.

Nomination facility in APY

It is mandatory to provide nominee details in APY account.

Subscriber needs to provide the spouse details too wherever applicable. This will help spouse to maintain the APY account or keep getting pension in case of subscriber's death.

Their aadhaar details are also to be provided.

Withdrawal procedure from APY

Here are the APY withdrawal scenarios-

Completing the age of 60 years – You need to pay premium till the age of 60 years. Once you reach the age of 60 you can submit the request for drawing pension. The whole accumulated corpus is converted to annuity and subscriber starts getting monthly pension.
In case of subscriber's death after 60 years – In case of death of subscriber pension would be available to the spouse and on the death of both of them (subscriber and spouse), the accumulated pension corpus would be returned to his nominee.
Pre-mature withdrawal before the age of 60 – Pre-mature exit (before the age of 60) is permitted only in exceptional circumstances like in case of death of the subscriber or terminal illness.
In case of death of the subscriber before the age of 60 years, spouse would be given an option to continue contributing to APY account of the subscriber, for the remaining vesting period, till the original subscriber would have attained the age of 60 years.

Penalties in APY

In case of delay in premium payment of your Atal pension yojana account additional amount has to be paid. Rules for that are as follows-

Re. 1 per month for contribution upto Rs. 100 per month.
Re. 2 per month for contribution upto Rs. 101 to 500/- per month.
Re 5 per month for contribution between Rs 501/- to 1000/- per month.
Rs 10 per month for contribution beyond Rs 1001/- per month.

Discontinuation of payments of contribution amount shall lead to following:

After 6 months account will be frozen.
After 12 months account will be deactivated.
After 24 months account will be closed.

Also note that there are some charges incurred for maintaining the APY account. If you stop paying the premium amount and the account balance becomes zero due to deduction of account maintenance charges, the APY account would be closed immediately.

APY Tax benefits

As per the update in 2016, APY provides the same benefits as NPS. Which means that premium amount paid can be claimed under section 80CCD. Current Limit for 80CCD tax exemption is Rs. 50 thousand.

Reference: https://npscra.nsdl.co.in/nsdl/scheme-details/APY_Scheme_Details.pdf

That's all for this topic Atal Pension Yojana - APY. If you have any doubt or any suggestions to make please drop a comment. Thanks!

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>>>Go to Pension Plans Page

Wednesday, 27 December 2017

Drawbacks of NPS

National Pension System (NPS) scheme was started by GOI in order to provide financial security and stability during old age when people don't have a regular source of income. The subscription to NPS is rising with the lure of additional tax break but still NPS has not got the traction it was supposed to get.

That is because of some of the drawbacks of NPS and some of the fears of the investors. In this post we’ll see some of these drawbacks so that investor gets the necessary knowledge and make an informed decision.

Points that go against NPS

Here are some of the drawbacks of NPS. Mind you some of these may be perceived as drawbacks by investors and not actually be a drawback if seen from a slightly different angle.

Very long duration – In NPS you need to contribute till the age of 60. If you are starting to contribute at the age of 25 that would mean a duration of 35 years where you invest money in NPS. While I do admit that exit and partial withdrawal rules are a bit complex but it is the long duration of the NPS that will help you to build a big corpus. Also don’t forget some of the amount is going to equity and it is a well documented fact that equities pay in a long term.
You have to see it as a pension plan which should start giving you back only after the age of 60, so long duration should not be a deterrence.
NPS corpus is taxed on maturity – Now this is one sore point and when compared to other long term products available like PPF (which is EEE), the idea of paying tax on the accumulated corpus makes people a bit wary of NPS.
Though there are ways to reduce tax liability, 40% of the corpus can anyway be withdrawn tax free and 40% has to be used to buy annuity. That leaves 20% of the corpus, which if withdrawn, will attract tax at the applicable tax rate. There is another option though, you can use that 20% also to buy annuity then it will not be taxed.

But beware of the fact that the amount you get monthly from the purchased annuity will also be taxed as per the applicable tax rates.

Another way to reduce tax is to defer the withdrawal of lump sum amount of 60%. NPS allows to stay invested till the age of 70 so you can withdraw in instalments and structure it in such a way that your tax liability is reduced.
Mandatory annuity – Another point that is making people not opt for NPS is the mandatory buying of annuity with at least 40% of the corpus. Most of us want to have full control of the amount after investing for so long. Moreover annuity return rate in India are in the range 5.5 – 7 percent. Which means for the amount of 50 Lakhs in annuity your monthly pension will come to about Rs. 30000-32000 and to add to that income from pension is fully taxable.
Partial withdrawal and exit rules - Exit and partial withdrawal rules are not very flexible are another reason given by investors to stay away from NPS.
If you want to exit before attaining the age of 60, at least 80% of the accumulated corpus should be utilized for purchase of an annuity which means you can only withdraw 20% of the corpus.

For partial withdrawal you should have been invested in NPS at least for a period of 10 years. Moreover only 3 withdrawals are allowed during the whole tenure of your NPS subscription that too for very specific reasons like like Child's marriage, higher education, treatment of critical illnesses etc.

There should also be a gap of at least 5 years between two successive withdrawals. Some relaxation in this gap is given only in the case of treatment for specified illness.

These rules put off few investors who want access to their money with in the tenure of subscription. But don’t forget NPS is supposed to be a long term investment exiting in between without any real emergency or partial withdrawal with out specific purpose will dent the effect of compounding where your accumulated corpus (prinicipal + interest) starts earning an interest.
Investment in equity – Many investors are conservative and don’t want to invest in equities. NPS does provide an option through Active choice to put the whole contribution in Government Securities or Corporate Bond Fund. But Active choice means you have to decide on the asset class and the fund manager. Investors find all that research too intimidating and want to go with Auto choice but in Auto choice equity percentage will be there. To avoid this dilemma people go with other debt options rather than opting for NPS.
At the same time there is another group of investor who want to be in control of their investment and want to decide how their contribution is invested. For them 50% cap on equity allocation even in Active choice is a source of concern.

Now we can see it as a balancing act by NPS (50% cap on equity) to keep both classes of investors happy. Investors who prefer equity should opt for some other mutual funds too with more exposure to equity.
Returns are not assured – In NPS returns are market linked. You are not given n black and white that these are your assured returns under NPS. Investors who want to have a clear picture where their money is going and how much they will get after the specific duration find it a bit risky.
This concern is valid in case market crashes in the year you are retiring which would mean a much smaller corpus than planned.

That is also one reason equity percentage is capped to 50% and you can also look into the option of keeping your investment with in NPS till the age of 70 and withdraw only in instalments.

That's all for this topic Drawbacks of NPS. If you have any doubt or any suggestions to make please drop a comment. Thanks!

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>>>Go to Pension Plans page

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, mandatory 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 for investment in NPS 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.

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.
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.
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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>>>Go to Pension Plans Page

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 choices for NPS 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 and in NPS parlance known as asset class E, C and G-

Equity (Asset Class E) - Investments in predominantly equity market instruments. According to new rules for private sector employees, 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 NPS contribution is invested. Now let's see the investment choices you have in National Pension System (NPS) and how they work.

Active Choice in NPS

If an individual chooses active choice as his NPS investment 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 in NPS

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's 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 in NPS

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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>>>Go to Pension Plans Page

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 (NPS) 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 - 65 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 five years (earlier the upper age limit was 60 years). That rule change to raise upper limit to 65 years make sense as you can contribute to NPS till the age of 70 years now.

Contribution till the age of 70

If a subscriber desires to continue to NPS beyond the age of 60 Years or superannuation, he needs to inform CRA (Central Record-keeping Agency) in writing in the specified form at least fifteen days before the attainment of 60 years of age or the age of auperannuation.

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 in NPS

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.

Refer National Pension System(NPS) investment choices - Active or Auto to get more idea about the NPS investment choices.

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.

Refer Tax exemption benefits of National Pension System(NPS) to know more about NPS tax benefits.

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.

To sum it up –

40% of the accumulated corpus can be withdrawn with no tax levied on it.
At least 40% has to be used in purchasing annuity.
Rest 20%, if withdrawn lump sum, will be taxed at applicable tax rate. If you want to avoid tax you can use that to buy annuity too. In that case 60% of the corpus will be used to buy annuity.

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 NPS Account after subscriber is in the NPS at least for a period of 3 years from the date of joining. (Earlier partial withdrawal was permitted only after 10 years).

The subscriber shall be allowed to withdraw only a maximum of 3 times during the entire tenure of subscription under the NPS.

Withdrawal from NPS corpus is permitted for specific purposes like-

Higher education of children including a legally adopted child.
Marriage of children including a legally adopted child.
Purchase or construction of a residential house or flat in his or her own name or in a joint name with his or her legally wedded spouse. If subscriber already owns a residential house or flat individually or jointly, other than ancestral property, no withdrawal under these regulations shall be permitted.
Treatment of critical illnesses covering subscriber, legally wedded spouse, children including legally adopted child, dependent parents. Diseases which are covered are as following-
cancer, Kidney failure (end-stage renal failure), primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, coronary artery bypass graft, aorta graft surgery, heart valve surgery, stroke, myocardial infraction, coma, total blindness, paralysis, accident of serious/life-threatening nature and any other critical illness of a life-threatening nature stipulated in the circulars, guidelines or notifications issued by the authority from time to time.

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!

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Tuesday, 5 April 2016

EPF Vs NPS: Which is better

In this post we'll see some of the differences between EPF and NPS and some salient points about both EPF and NPS. This will help you to have better understanding of these terms.

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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