11 Myths About NPS Busted
Written on Tuesday, September 19, 2017
By Anil Chopra- Group Director
NPS is a much talked about pension plan and its popularity is growing rapidly since the last couple of years. However, there are several myths surrounding this wonderful tax-saving retirement option. This blog is busting some of these myths which have been identified as the most common NPS related misconceptions among general public and prospective investors.
Myth #1: Full form of NPS is “New Pension Scheme”. There is a bit of confusion about the full form of NPS which is “National Pension System”. NPS was launched in the year 2004 initially for Government employees joining on or after April 1, 2004. Subsequently, its coverage was increased beyond Government employees.
Myth #2: NPS is available only to salaried class persons. Untrue. NPS is open to the general public including salaried class, businessmen, professionals and self-employed persons. In fact, one of the main objectives of launching NPS was to make pension available for non-salaried citizens.
Myth #3: NPS gives extra tax deduction of only Rs.50,000 over and above Section 80C. True, yet not completely true !! Yes, under Section 80CCD(1b), all individual taxpayers can claim additional deduction up to maximum of Rs.50,000 in addition to deduction available under Section 80C (up to Rs.1.5 lacs). Thus, total deduction under Section 80C and NPS can be extended up to Rs.2 Lacs. However, there is an additional provision under which extra deduction beyond Rs.2 lacs can be claimed if the employer contributes to employees’ NPS up to a maximum of 10% of his/her basic salary. This is probably the least known additional benefit of NPS. Please carefully note that this additional deduction is allowed under Section 80CCD(2). However, please note that this additional deduction under Section 80CCD(2) is available only to salaried employees. Another important aspect to note here is that there is no upper limit to this deduction amount. For example, if a salaried person whose annual salary is Rs.10 lacs (Basic + DA) and if his employer agrees to contribute 10% of the same i.e. Rs.1 lac towards employees’ NPS Account, then employee will be entitled to additional deduction of Rs.1 lac from his gross taxable income in addition to Rs.1.5 lacs under Section 80C and Rs.50,000 under Section 80CCD(1b). Thus, it becomes a valuable salary structuring tool to ensure that the incidence of tax is reduced.
Myth #4: Maximum contribution to NPS in a year is Rs.1.5 lacs. Completely false. There is no upper limit. The subscriber may invest even Rs.10 lacs or higher amounts which will help him to receive much higher pension every month on retirement. The only point to note here is that tax benefits will be limited to certain sections as discussed elsewhere.
Myth #5: Contributions to NPS have to be a fixed amount every year. Untrue. There is a lot of flexibility here and the subscriber may choose any amount (minimum of Rs.500) and in any number of times during a particular financial year. For example, one may invest Rs.1 lac lump sum in one year, Rs. 5,000 every month in the second year and only Rs.1,000 once in the third year etc. In nutshell, a subscriber contributes as per his ability without any restrictions.
Myth #6: Pension from NPS is tax-free. False. Like every other pension, monthly pension to be received after your desired retirement age (60 or thereafter), will be added to your taxable income and taxed according to the slabs prevailing then.
Myth #7: Lump sum amount received on retirement date is tax-free. These rules need to be clearly understood. Subscribers have an option of not taking any lump sum payment at the time of retirement and convert their entire corpus into a monthly annuity and in such a case, the question of tax on lump sum does not arise and monthly pension amount shall be subject to tax as already discussed. However, in case of subscriber decides to avail certain funds as the lump sum, he can do so by opting to receive up to 40% of the corpus amount without paying any tax on the same. Maximum amount which subscriber can opt to withdraw as lump sum is restricted to 60% of the corpus amount and in such a case, only 40% will be treated as exempt from tax and balance 20% will be added to taxable income in that particular year and will be subject to tax as per the applicable slabs.
Myth #8: NPS investments are managed by PFRDA/Government. Incorrect. PFRDA has appointed 8 reputed Pension Fund Managers like HDFC, SBI, ICICI, LIC etc. and their track record so far is quite good. So, unlike EPF, which is managed by Government appointed PF Trustees, NPS Schemes are managed by reputed Private/Public Sector Fund Managers (regulated by PFRDA) and because of their low-cost structure, NPS Schemes are able to deliver superior returns.
Myth #9: Once decided, the subscriber cannot change either the Pension Fund Manager or the allocation percentage to Equity and Bonds etc. Here also, there is enough flexibility to change Pension Fund Manager as well as to alter his asset allocation percentages. There are 8 approved Pension Fund Managers and the subscriber can shift from A to B to C once in a year. Similarly, asset allocation between Equity, Government Securities, and Corporate Bonds can also be altered twice every year. So, if the subscriber is not happy with the performance of a particular Pension Fund Manager, he may opt to shift to another one in the next financial year.
Myth #10: NPS subscribers cannot access their funds before the vesting/retirement age. Retirement age has been fixed at 60 years which can be extended to 70 years at the discretion of the subscriber. However, in emergency subscriber can partially withdraw up to 25% of his own contribution any time after the expiry of 3 years from the date of opening of NPS Account.
Myth 11: NPS is a wealth creation tool due to high exposure to Equity. False again. As per the current provisions, maximum allocation to the Equity cannot exceed 50% of subscriber’s contribution. Even if the subscriber chooses “Default” option, the allocation between Government Securities, Corporate Bonds and Equity will keep on changing with every advancing year and exposure to Equity will be reduced as per a preset table. However, please note that at any given point of time, exposure to Equity will not be higher than 50%. Thus, the subscriber may attain decent returns as expected from a balanced fund.
Hope that the busting of abovementioned common myths have contributed towards clearing your doubts and confusions which generally prevail in the minds of prospective/ existing investors in NPS Schemes. This is a “must have” option in every citizen’s financial portfolio. However, total funds in NPS should not be more than 25% of one’s total financial portfolio.