Month: January 2019

NPS Tier II Tax Saving Benefit: FAQ and clarifications

Published: / Modified: / freefincal Twitter: @pattufreefincal

Here is an FAQ on the NPS Tier II account and clarifications on the proposed tax saving benefits.

What is a Tier 2 NPS Account?

This is a mutual fund you can invest with no lock-in period and no obligation to buy a pension (annuity) like with Tier 1. Please note that Tier 1 is also a mutual fund. You cannot open a Tier 2 account without a Tier 1 account.

Can I get tax saving benefit with a tier II account?

Non-central government employees cannot use Tier II for tax saving. From 1st April 2019 onwards central government employees with mandatory NPS accounts can save tax with a tier II account. However, the total tax saving benefit will be limited to 1.5 lakh under section 80 C. That is, if a central government employee invests Rs. 1 lakh in Tier I, then Rs. 50,000 than be invested in Tier II for tax saving under 80 C.

What is the taxation for NPS Tier II investments?

There is no official information in this regard! When I asked NPS authorities regarding this, they only said a switch of money from Tier II to Tier I is non-taxable.

What is the minimum contribution per year for Tier II

It is Rs. 2000 a year with each contribution being at least Rs. 250 and Rs. 1000 as the minimum contribution when opening the account.

What are the investment options under Tier II?

You can invest 50% in equity (E) and no more. Rest can be in government bonds (G) or corporate bonds (C).

Should I invest a Tier II account if I have a Tier I account?

There is no benefit in doing so. Use a mutual fund invest.

Sovereign Gold Bond Scheme 2019-20 (Series VII): Should you buy?

Published: / Modified: / freefincal Twitter: @pattufreefincal

Sovereign Gold Bond Scheme 2019-20 (Series V)  will be available for sale in the primary market between Dec 2-6, 2019. However, should you buy these? When and for what purpose.

A sovereign gold bond is a way to track the price of gold without actually investing in gold. It was introduced to reduce the import of physical gold. Although the motive of the government may not have come good, these bonds offer a chance to plan for a future gold purchase in a risk-free manner as explained below

Issue price: The series 1V issue price for the offline purchase is Rs. 3,795 per gram. For online purchase and digital payment an Rs. 50 discount is applicable.

Eligibility resident Indians, HUFs, and other institutions

Duration 8 years

 

Sovereign Gold Bond Scheme Taxation

The bonds pay an interest rate of 2.5% annually and this is subject to tax as per slab. However if one holds the bond up to maturity (8Y), then the gains (if any) are tax-free.

If one wishes to sell, one can do so with a demat account in the secondary market or after 5 years, but then the gain (if any) is taxable subject to capital gains tax of 20% (+ cess) with indexation of the purchase price.

How to use Sovereign Gold Bond Scheme in a risk-free manner?

Suppose your daughter is going to get married in 10 years. You buy such bonds whenever you can and for whatever amount you can afford.

Hold them to maturity and you pay no tax. The final amount you get, even if it is a loss, will always reflect the current 24-carat gold price. So you can always buy jewels (22 carats only) with that amount with no investment risk!

Do not use Sovereign Gold Bond Scheme as an investment!

The above is an example of future gold consumption. If you buy these bonds expecting returns then buying and holding for 8Y can be extremely risky. See an example here: What you need to know before buying sovereign gold bonds

Never forget, that gold price movement is more volatile than stocks!!

NPS Withdrawal Rules 2019 Explained

Published: / Modified: / freefincal Twitter: @pattufreefincal

On 21st Dec. 2018 , the Pension Fund Regulatory and Development Authority (PFRDA) has changed the norms for withdrawal of National Pension System (NPS) subscribers. Here are the details.

NPS Withdrawal Rules 2019 (partial)

Earlier partial withdrawals from NPS Tier 1 was possible only after the account was ten years old. In a welcome move, this has been reduce to three years!

However, this is applicable only from August, 10th 2017 and not to older subscribers. This is unfortunate and must be allowed.

Also, with effect from the same date, that is, 10th August 2017, the minimum gap of 5 years between two partial withdrawals has also been removed. This also is another welcome move.

However, it should be noted that, NPS subscribers can only partially withdraw thrice for the reasons given below.

Also there is an additional important limitation. Each withdrawal cannot exceed twenty-five percent of the contributions made by the subscriber and excluding contributions made by the employer. This continues to be a serious limitation as if the need is dire, then the employee cannot fall back on NPS.

Eligible reasons for partial withdrawal from NPS

  1. higher education and marriage of children
  2. purchase or construction of a residential house or flat individually or jointly with spouse. This is allowed only if subscriber does not have an previously purchased property with the exception of ancestral property.
  3. treatment of specified illnesses of subscriber, spouse, children, dependent parents
  4. skill development/re-skilling or for any other self-development activities.
  5. Establishment of own venture or any start-ups.
  6. medical & incidental expenses due to disability or incapacitation.

Illness eligible for partial withdrawal in NPS

(a)Cancer;

(b)Kidney Failure (End Stage Renal Failure);

(c)Primary Pulmonary Arterial Hypertension;

(d)Multiple Sclerosis;

(e)Major Organ Transplant

(f)Coronary Artery Bypass Graft;

(g)Aorta Graft Surgery;

(h)Heart Valve Surgery;

(i)Stroke;

(j)Myocardial Infarction;

(k)Coma;

(l)Total blindness;

(m)Paralysis;

(n)Accident of serious/ life threatening nature.

(o)Any other critical illness of a life threatening nature as allowed

Summary

The revised NPS withdrawal rules are welcome. However for some situations like critical illness, accident etc. the 25% withdrawal limit should be removed. Nonetheless, these changes are a step in the right direction.

NPS Resources

Check out our previous posts on the NPS

How to make online contributions to NPS Tier I and Tier II accounts

NPS has EEE (tax free) Status! Here is why you should still not invest

Do Not Invest Rs. 50,000 in NPS for additional tax saving benefit!

Small Saving Scheme Interest Rates List (Oct-Dec 2019)

Published: / Modified: / freefincal Twitter: @pattufreefincal

Here are the small saving scheme interest rates for the quarter Oct to Dec 2019 issued by the finance ministry.   Data source: National Small Savings Institute

The current PPF interest rate is  7.9%

The current Sukanya Samriddhi Account  interest rate is 8.4%

Instrument Rate of Interest w.r.t 01.07.2019 to 30.09.2019 Rate of Interest w.r.t 01.010.2019 to 31.12.2019 Compounding Frequency
Savings Deposit 4 4 Annually
1 year Time Deposit 6.9 6.9 Quarterly
2 year Time Deposit 6.9 6.9 Quarterly
3 year Time Deposit 6.9 6.9 Quarterly
5 year Time Deposit 7.7 7.7 Quarterly
5 year Recurring Deposit 7.2 7.2 Quarterly
5 year Senior Citizen Savings Scheme 8.6 8.6 Quarterly and Paid
5 year Monthly Income Account 7.6 7.6 Monthly and Paid
5 year National Savings Certificate 7.9 7.9 Annually
Public Provident Fund Scheme 7.9 7.9 Annually
Kisan Vikas Patra 7.6 (will mature in 113 months) 7.6 (will mature in 113 months) Annually
Sukanya Samriddhi Account Scheme 8.4 8.4 Annually

Thus there is no change in interest rate. The PPF and Sukanya schemes continue to fetch a comfortable 7.9 and 8.4 percent return.

The senior citizen savings scheme continues to offer a decent 8.6%.

Source: National Savings Institute India website