POSTED BY September 27, 2013 12:10 pm COMMENTS (14)
ONHI Manish / Others,
My employer is starting to provide option to employees to opt (voluntary, not mandatory) for NPS Corporate sector model in which employer will deduct my Special Allowance (which is fully taxable@20.6%) with an amount of Rs 3675 (10% of my basic salary of 36750 per month) and deposit this amount in NPS account which will save me 20.6% of tax as per IT section 80CCD(2). This will save me Rs 9100 per year as income tax savings. However employer will also deduct Rs 500 per month from my salary so as to deposit Rs 6000 per year in my NPS account since 6k is minimum which u need to invest as an employee. This will not save me any tax as I consume 80C anyway with PPF and EPF. Now every transaction in NPS has charges of Rs 23 (charged by POP including sevice tax) so total cost will be Rs (23*24=552) + Rs 350 (Annual maintenance charges by CRA) totaling Rs 900 as charges for an amount of Rs 50100 yearly. This is 1.8% as charges and 0.25% fund management charges so total charges will be 2.05% which seems quite high if compared to mutual fund like QLTE (1.25% only). However saving of 20.6% as income tax should well offset this 2.05% charges.
Hence I want your expertise analysis as to whenever I should go for this NPS option. The negatives which I have in my mind are taxable pension, taxable lumpsum withdrawal, compulsory annuity, cant exit even if PFRDA increases charges further during next 30 yrs ( 60 minus 30 yrs my present age), limitation of 50% equity, less returns as compared to diversified MF which are tax free after 1 yr.
Please help me to decide. I dont want to get trapped in a product from which I cant exit for next 30 Yrs. Thanks.
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In case someone looks into the thread for this information, taking out of FAQ for corporate model NPS –
47. Is it mandatory for the subscriber to contribute on his own in his / her Tier I account along with corporate contribution?
This is not mandatory. It a choice of individual subscriber to contribute to his / her Tier I account over and above the contribution made by the employer. However the subscriber needs to ensure that minimum contribution (including corporate contribution) in his / her Tier I account for the financial year is Rs.6000.
Hi Abhishek,
Equity can do wonders in long term and your calculation will not be valid. I would stick to my recommendation what I said earlier.
Regards,
Sushant
Dear Abhishesk, we can plan our moves based upon the available info as on date. We can not plan for any unknown info. So what ‘ll be the tax rules 30Y down the line no one can predict and hence it’s useless to calculate on that. The most important thing you are missing in this whole discussion, what ‘ll you do about pension if it’s falling short of your expectation? there is no guarantee on pension as on date. You can only create corpus as of now. If you opt to skip this tax saving through NPS, at least you have control in your hand for your corpus. So take your move with a caution.
thanks
Ashal
Awaiting reply from Sushant and Manish eagerly.
Dear Abhishek, keep on calculating and by the time you turn 60, you ‘ll know what was good for you. 🙂
thanks
Ashal
Agreed Sushant. Totally. Sorry if I am making it a bit more complicated, but to finish it off, I need u to reply this one too.
What if I contribute 10% of basic in NPS and invest the rest amount in pure equity MF? That will save me tax via NPS as well as create a healthy corpus via MF, isnt it? The answer looks NO. Why…. bcoz I did some calculations here. If I contribute Rs 3675 per month (10% of basic) in NPS and expect just 8% return compounded annually, the corpus would be 52 Lacs. Now, 60% of this 52 lacs which is 31 lacs is what i get as lump sum. If I deduct taxes on this 31 lacs, I still get 23 Lacs. Now add 21 lacs of annuity (40% of 52 lacs), so total is 44 lacs. Now lets see MF. If I invest same Rs 3675 in MF for 30 yrs, I get 63 lacs assuming I get 9% per year compounded annually. So the final corpus would be 19 Lacs more with MF compared to NPS. Even if we consider tax savings of 9k per year and invest this in MF, we get 13 lacs after 30 yrs. So total corpus with NPS can be 44 plus 13 = 57 Lacs. Hence there is still a difference of 6 lacs. What do u think?
Abhishek,
I said it’s tricky as NPS has its limitations. You can not put more than 50% in Equity. The final withdrawal ( at the age of 60) is taxable as per today’s law. So, if you just put the (X-20%) today in an pure Equity fund what you get at 60 (total tax free) may beat the amount that you get at 60 for the amount X invested today in NPS considering post-tax return.
I know it’s a bit far fetched thinking. No body knows how future will turn in terms of return. If you are young don’t go for NPS and invest in pure equity MFs. When you reach 30% bracket you can consider putting in NPS.
Regards,
Sushant
hi Sushant,
Many thanks for replying. I am not so sure abt that Rs 500 stuff, it has been communicated only verbally. We will know abt that after we enroll for NPS. Nextly, why do u think its a tricky call for 20% slab guys? I mean it still saves 20% tax. 🙂
Hi Abhishek,
Are you sure about the Rs. 500 . going from employee’s salary to make it 6K per annum thing? My company has NPS corporate plan, but does not take anything from employee part. Hence, there is only employer contribution which is total tax-free.
I had opted for this plan purely for **additional** tax-saving, since there is no other way I could have saved tax on this amount. I fall in 30% category and hence I found it more suitable to me, pros winning over cons. In 20% category, I would say it’s a tricky call. I would recommend to wait till you reach 30% bracket or till NPS becomes more favorable( when DTC comes) whichever happens first.
Regards,
Sushant
Manish, Can u please please respond on this?
I am getting quite good responses from Ashal, but ur response will let me decide even better.
Dear Ashal,
Thanks for the reply. Even I am not satisfied with current nature of NPS. Though I am still considering it bcoz of etxtra tax savings which no other will provide. Please note I am not considering NPS for wealth creation anuway. MF will do better for wealth creation. I was wondering if I should invest the 50k in NPS and rest amount as per my needs in MF. Or I should invest the rest plus 50 in MF for better returns. Thats whats I need to know. I repeat…. need to choose betweek below 2 options:-
Option 1:- Contribute 50k anuually in NPS for extra tax savings and creation of wealth. Though I understand returns will be low compared to MF, so I will contribute rest of my money (say X amount) in MF.
Option 2:- Contribute X amount plus 50k in MF and forget abt NPS.
Which option would be more benificial considering tax savings but low returns in option 1 and also considering no tax saving in option 2 but high returns.
Dear Abhishek, personally I’m not satisfied with NPS in it’s current Avatar. If you feel tax saving is more important to you than wealth creation, you arw welcome to invest in NPS. 🙂
thanks
Ashal
Dear Abhishek, I w’d pay my tax to keep control in my hand for investing my money. Should I say more?
thanks
Ashal
Thanks Ashalanshu. Does I conclude from u that NPS isnt a good tax investment?