NPS: Should you Invest or Not?

What is NPS:

National Pension System (NPS) is a voluntary, retirement savings scheme through systematic savings during their working life. Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime.  The scheme is structured into two tiers:

Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.

Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber.  The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.

It can be valid across all jobs and locations. This is regulated by PFRDA (pension Fund Regulatory And Development Authority).

At the time of exit subscribers may withdraw the lump sum amount or may convert the amount to an annuity fund to withdraw as monthly pension or combination of both.

Tier-II account may be converted to Tier-I account but vice versa is not possible.

Tax Benefit:

From the FY 2015-16, 10% of the salary contributed in the NPS is eligible for a tax deduction up to Rs.1.5 lakh under the section 80 CCD and above this, you get an additional deduction ofRs.50,000, taking the total deduction benefit to Rs.2 lakh.

Although you will get extra tax deduction for what you invest in NPS, the maturity is still taxable. This is the major drawback I have found.

Under the EPF, PPF you get a deduction of only up to Rs.1.5 lakh under section 80C. But the maturity amount from it is tax-free.

NPS maturity corpus is taxable. This means you have to pay income tax on the 60% that you withdraw from NPS. The annuities that you get are again considered income and are taxable. Once the rules change and NPS becomes tax-free, which we hope, it will become a very good product because of its low costs.

Returns

So now the question is, should one open a NPS account to avail the additional 50,000 tax deduction?

Suppose I invest 50,000 a year in NPS for the next 15 years and get a return of 10%. I will get Rs. 17.97 Lakhs before taxes.

The return from NPS will be taxed. Not just the gains. If I am in 30% slab, the post-tax maturity value is Rs. 12.58 Lakhs.

Suppose my taxable income is 12,00,000.  I have managed to save Rs. 1,50,000 in say PPF+EPF+ELSS.

So my net taxable income now is Rs. 10,50,000

Case A: The total tax liability is Rs. 1,35,000. So I am left with Rs. 9,15,000 to manage my investments (other than Rs 1,50,000) and other expenses.

If, I invest Rs. 50,000 in NPS, the net taxable income is, Rs. 10,00,000.

Case B: The total tax liability is Rs. 1,25,000. So now I am left with 10,00,000-1,25,000 = 8,75,000 to manage investments (other than Rs 1,50,000) and other expenses.

In Case A, I do not invest in NPS. So I am left with Rs. 40, 000 extra. I can invest this in an equity mutual fund for 15 Y at 12% return (Min). I will get Rs. 15. 86 Lakhs.

In Case B, I invest in NPS. Meaning I do not have any extra sum left. My NPS investment for 15Y at 10% return will give be the same Rs. 12.61 Lakhs.

Please do not invest in NPS for tax-saving only. It has liquidity issue and If you quit before age of 60 years, 80% of the money will be locked in an annuity. After 60, minimum 40% is the annuity requirement.

Paying the tax and investing in equity mutual funds you will be able to beat NPS return.

Hence, please do Not Invest in National Pension Scheme to save Tax only

Contingency Amount: A must have for all

Yesterday, I failed to pay my credit card bill of Rs 80000 because of insufficient amount in my account.
I think you are bit surprised why I am saying like this. Last month one of my best has friend has asked me for some financial help. His father was admitted at the hospital. To pay the hefty hospital bill he needs some help. I had no option other than saying yes to him. I paid the Rs. 80000 from my credit card to pay partial amount of the hospital bill which he required.
I thought the bill payment date of the card was far from the date, so it will be arranged anyway. After some days friend’s father was again hospitalized and I could not ask for the money to him. I decided I have to arrange it by myself only.
I approached to Axis Bank (Credit card provider) for conversion the amount into an EMI. I have found that it will cost the processing fee of Rs 1200 and interest rate is 18%. So, I have decided to go for a personal loan from my company cooperative society.  This loan costs the processing fee of Rs 50 only and interest rate is 12%. I have applied the loan first half of april and ultimately due to some internal procedure I am unable to receive the amount on the last payment date i.e. 05^th april. Till now I have not received the loan amount and the credit card bill is outstanding.
I am using credit card since 2011. I have never failed to pay the credit card bill in time. This is the first time I am facing this issue.
I think, if I have the contingency amount in my bank account I may not be having this problem. So everyone should have 3 months expense in their savings account if they not want to face these unforeseen circumstances.
Request everyone to have contingency amount in their savings account as it is very important to shape up your personal finance.

A Simple 3 Steps Guide to be Tension Free at Tax Season

As the month of March is coming for this year, what comes to our mind first is Tax Saving or how much I will get as Salary in this month. Most of the salaried persons like us started their tax planning when they get notified by their employer about filling up their Form-C. We fill up the Form-B or the projected investment exhausting the limit like Rs 150000/- in 80C. After that we forgot about our commitment. During the filling up of Form – C we ended up with short of investments. As a result we start buying whatever our friends (Insurance agents) suggest. These investment decisions become wrong most of the time. Many of our friends and colleagues are also facing similar situation investing in the wrong instrument. Many persons do not want to invest so many amounts because of shortage of money at this month. They prefer giving 10% tax which gives them more comfort. So I request all to follow simple 3 steps:

1. Please prepare your tax planning in the start of the financial year i.e. April month. As the budget is announced in the February and one month i.e. March is to understand the budget. After necessary analysis in the March you can go ahead one by one starting from April.
2. In the September month you review your investment properly. If it is not in line with your planning, please try hard from that time to maintain the schedule.
3. In January again review your portfolio and if there is any extra money available you can channelize it to some instruments other than tax saving. In March prepare the form-C correctly. 

Hope all of you will follow these steps in the next financial year starting in April, 2015.