New Pension Scheme and Me

Published: August 19, 2013 at 6:30 am

Last Updated on September 11, 2016

Just so you know, I am currently being investigated by the income tax department for discrepancies in my tax returns a couple of years ago! When I got the letter to  appear before an IT official a few months back, I was too sick to do so and had to request a postponement.

Me and my cousin (a competent CA) spent quite a bit of time wondering why I was being investigated. We didn’t come up with anything and everything seemed correct. My cousin represented me a month ago in the hearing and found that according to their (incorrect) records the TDS amount deducted from my income was twice of what I had declared in my return. This meant that I had paid taxes for only half my income and hence a red flag was raised by the system!

Thankfully this was cleared up when the official ran some checks. I was told an official letter to this end would soon be sent out. You are probably wondering what this has to do with the New Pension Scheme. Let me get to it.

Crorepati academic: A few days ago I received a phone call from the same IT official who was investigating me. She told me that, according to their records, my Tier I NPS corpus is more than Rs. 3 Crores! So she wanted my latest NPS account statement to clear up this matter.

As fantasies go, this is an excellent one! How I wish I had 3 Crores in my NPS account! I could retire now, annuitize 80% of that, invest the rest and work where I please and when I please!

Photo by Jose Madrid  (Flickr)
Photo by Jose Madrid (Flickr)

When I mentioned this to the official, she laughed and said, “yes I found it unbelievable too. Which is why I called you!”

Sadly crorepati academic is an oxymoron!

The 80CCD advantage: She then went on to point out another issue in my IT returns. I paid lower tax last year then the year before that despite an increase in salary. Usually when I am put on the spot like this I don’t have the presence of mind of answer properly. Thankfully this time though, I knew the answer.

From last year the ITR forms have a separate entry in the deductions section for specifying the employer contribution to the NPS. This significantly increases the deduction amount if an employer contributes to the NPS.

For example if the total annual contribution to the NPS of a government employee is 2 Lakhs, then 1 Lakh comes out of gross salary, and 1 Lakh is contributed by the government. The 1 Lakh deducted from salary forms part of 80CCD (section c in the ITR form). The 1 lakh contributed by the government forms part of 80CCD (section d).

So the total deduction is the amount in 80CCD(c) (part of the 80C 1 lakh limit) plus the amount in 80CCD(d). Thus there is a total deduction of 2 Lakhs. This new ruling had led to a marked decrease in my tax outgo and had caught the tax officials eye.

Thankfully, my investigating officer was knowledgeable and sensible. When I explained this to her, she patiently listened and understood the situation.

Returns from NPS: When I located my NPS account statement to be sent to the IT department, I realized that I have never once bothered to calculate returns. So I dropped everything else and got to it.

As a central government employee, I do not have the freedom of asset allocation. Each month the total contribution in my name is invested in 85% of debt securities and 15% equity. So for all practical purposes, NPS for me, is nothing more than a debt oriented mutual fund. Each month the total subscription is invested in SBI, UTI and LIC retirement funds in roughly equal proportion.

The net return from March 2010 to May 2013 is an impressive 11.56%. Then came the rupee slide and the bond crash. The net return from March 2010 to August 2013 is  6.8%. A pretty steep fall! It will take quite a while to recover back to double digit returns.

Is the NPS suitable for individual investors? Forget low fund management charges, forget tax breaks, forget taxation issues.  A retirement corpus should not be built with a single product. Whether it is NPS or LICs pension plan, a single product is inevitably inflexible and there is an inherent limitations to returns that can be generated.

Perhaps if the 80C limit is made 3 lakhs or if NPS is made the only instrument eligible for 80 C deduction under the direct tax code, NPS could be part of a well diversified portfolio.

If a firm adopts the corporate NPS model and offers an option: EPF or NPS, should one choose NPS?

Corporate NPS only makes sense for the employee who has no plans to leave the firm. Job changes (due to resignations or lay offs) pose a problem if the new employer does not offer NPS.

Even for someone with a relatively stable job, NPS is a good option only if the NPS subscription is less than 50% of the total monthly investment towards retirement.

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