Few of the factors that should necessarily be factored in while making a sound investment decision include one's investment goals, returns, deduction allowed, future taxability on the investment option. And while a host of the available options that also tax deduction under section 80C provide exemption on return benefit, few of the options do not come with this benefit.
Nonetheless, NPS has been now rendered more taxpayer friendly as the tax exemption that has now been extended to complete 60% withdrawal that can be made at the time of maturity. So, the defined contribution based instrument helps one get some lump sum amount at the maturity and then the remaining is retained as fixed monthly income. The proposal is however to be implemented from the next financial year 2019-20. At present, 40% of the withdrawal at the age of 60 years is tax-exempt.
Further after the proposal is implemented, remaining 40% of the corpus is mandatorily required to be invested in monthly pension annuity plan.
Also, when considering the return factor, in the last 5 years, all of the funds within the instrument have managed to provide double-digit return to its investors. And as per the Value Research data, of these aggressive portfolio investors have earned the highest return of 11.31% in 5 years time, followed by balanced, conservative and ultra-safe portfolio bet.
Here's how NPS offers tax benefit to investors
In case of employer contribution, exemption is available subject to a limit of 10% of salary and in case of employee contribution, deduction is offered up to 10% of Salary (Basic + DA) subject to a total cap of Rs 1.5 lakh.
In case of self-employed investor category, deduction is available up to 20% of gross income within the total cap of Rs. 1.5 lakh. And further a deduction of up to Rs. 50,000 is available for investment towards NPS to both the employee as well as self-employed taxpayers. So on an overall basis, an individual can claim a income tax deduction benefit of up to Rs 2 lakh- Rs. 1.5 lakh under Section 80CCD (1) and Rs. 50,000 under section 80CCD (1B).
For income tax purposes, "salary" for calculating the contribution towards NPS (Section 80CCD (1) and Section 80CCD (2)) excludes allowances and perquisites. Employer's contribution towards NPS is considered part of salary.
Few important points to note: It is to be noted that the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year.
Now NPS investors can invested till the age of 70 years and stagger their withdrawals. Also, fund managers have been allowed to now invest in a broader universe of stocks and need not necessarily mimic the Nifty.