Mumbai: As we approach the end of this financial year, tax planning becomes important during last quarter of the fiscal year for any person having taxable income. Proper tax planning is important in many ways as it not only ensures higher savings but also helps in achieving better financial goals. Meanwhile, choice of a wrong product can put one’s future at risk.
While there are many long-term savings products available in the market, the government-sponsored National Pension System - popularly known as NPS scheme - is one such product which is ideal for long-term pension planning. Recent changes in the taxation structure with higher tax savings make the national pension scheme more attractive for individuals as a pension product.
“Budgetary announcement of additional Rs 50,000 tax savings make NPS attractive for individuals seeking to invest in pension product. As this is over and above the earlier limit of Rs 1,50,000; NPS is a good product to invest in,” Rohit Grover, a Certified Financial Planner with Mumbai-based investment advisory firm, MoneyFrog told The Finapolis.
He, however, added that the advisory firm normally recommends NPS to people with higher disposable income and who are seeking tax savings after exhausting their Rs 1,50,000 limit.
An Indian citizen can save up to Rs 1,50,000 under the combined section of 80C, 80CCC and 80CCD (1). However, this year budget has added a new section 80CCD(1b), which provides additional tax deduction up to a limit of Rs 50,000 if he/she invests in NPS. Under the new provision, if the taxpayer contributes more than Rs 1.5 lakh to the NPS in a year, the amount in excess of Rs 1.5 lakh can be claimed as a deduction under the new section up to a limit of Rs 50,000.
Higher returns than debt funds:
As a long-term investment product, NPS also provides higher post-tax return than fixed maturity or debt fund products. With new tax savings norms, this pension scheme is not only tax efficient, but also gives higher returns than other fixed maturity product. “With 50% equity investment option, the return will be higher than other fixed maturity product,” Grover said.
The NPS has three asset classes namely E, C & G under which subscribers have the options to invest. Asset class E pertains to equity for which the cap of investment has been fixed at 50%. While Class G invests in government securities, Class C invests in corporate bonds and other non-government instruments.
The PFRDA (Pension Fund Regulatory and Development Authority) has also introduced aggressive life-cycle policy, in which equity investment portion is allowed up to 75% up to the age of 35. Post 35, equity portion of investment comes down gradually. However, this scheme is not available for government employees.