FM's steps will make NPS attractive; ball in pension fund authority's court now
While life insurance may not be strictly necessary for those who are not going to leave behind dependants, pension is a must for the non-propertied class
One must provide for the rainy day especially if s/he does not have a prime property that yields steady stream of income to take care of post-retirement needs including for geriatric Medicare that is decidedly expensive, with insurers by and large cold shouldering the aged.
The central government therefore launched New Pension System (NPS) from 1st May 2009 with the pension watchdog Pension Fund Regulatory and Development Authority (PFRDA) as its lynchpin.
The Income tax Act 1961 (the tax law) on its part puts its weight behind the idea of pension by giving attractive tax benefits for life during the sunset or twilight years of one’s life when one’s earnings plummet. Section 80CCD divides the participants in pension schemes into two—the salaried class and others.
For the salaried class, their contribution upto 10% of their salary is tax deductible with a matching contribution made by their employers also enjoying the same tax benefit. Non-salaried individuals willy-nilly have no employer support and therefore whatever amount they want to invest in pension, has to come from their own coffers.
In their case, the ceiling is 10% of their Gross Total Income. In either case, until now, there was a ceiling of Rs 1 lakh as deduction. Budget 2015 does away with this constricting limit. Therefore, from the assessment year 2016-17, pension oriented savings would not be hamstrung by any monetary limit.
Budget 2015 has gone a step further. Hitherto pension literally meant NPS except for government employees who joined service before 2004.
The government, with a view to providing competition and tacitly acknowledging the need for more and more schemes akin to NPS, has said vide the amendment to section 80CCD through the Finance Bill 2015 that while the above deduction would continue to be available, a fresh and additional deduction of up to Rs 50,000 would be available exclusively for contributions to NPS with a view to wooing investors into the government sponsored scheme.
The centerpiece of NPS is allotment of Permanent Retirement Account Number (PRAN) which resembles to Permanent Account Number (PAN) insisted upon by the income tax authorities to recognise taxpayers. PRAN is a unique number to identify retirement savers under NPS so that their savings status for the old age can be found out with a click of the mouse.
On reaching the age of 60, a PRAN holder must exercise his choice -- in what combination he would like to savor his old age reward. But a minimum of 40% of his accumulations must mandatorily be converted into annuities i.e. pension which means only 60% is capable of being received as lumpsum.
NPS is available in two models. Under Tier 1, no withdrawal is permitted during the accumulation years, i.e. until the age of 60 whereas under Tier II in-between withdrawals are permitted subject to minimum balance condition.
For central government employees joining service on or after 1st January 2004, NPS is mandatory. Their predecessors, however, would continue to get free pension. But newcomers have to earn their pension by contributing while in service.
Ever since its launch, NPS has outperformed PF (provident fund) with greater latitude to invest to equities doing the trick. PFRDA permits the pension fund managers to invest up to 15% of their corpus in equities which admittedly give the best returns over a sufficiently long period of time.
Many of the fund managers have been treading cautiously and not exhausted this quota of 15%. Yet they have been able to deliver better returns thanks to their cautious dalliance with equities.
Jaitely has done well to drive home the importance of saving for the rainy day. PFRDA must now do its part. It hasn’t been as proactive as its insurance counterpart, the IRDA, in propagating the idea of old age pension.
While life insurance may not be strictly necessary for those who are not going to leave behind dependants, pension is a must for the non-propertied class, especially the ones who due to a variety of reasons cannot bank upon the tender care of their offspring during their sunset years.
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