New Pension Scheme and Me

Published: August 19, 2013 at 6:30 am

Last Updated on

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.

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

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.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps