As we approach the end of FY2018-19, it is that time of the year when your employer would be requesting you to furnish proofs of investments made during the year, to claim deduction from taxable income, to save on tax deducted at source (TDS) from your salary income. Let us look at some of the investment avenues which can be deducted from an individual s taxable income (up to certain limits and subject to certain conditions).
National Pension System (NPS): NPS can help in building an individual s retirement corpus and creating a portfolio that can beat inflation. Income tax benefits are one of the key advantages of investing in NPS, which is open for both salaried and self-employed individuals. NPS has two types of accounts: Tier 1 and Tier 2. Tier I is the retirement account subject to restrictions on withdrawal which gets the tax breaks, whereas Tier II is a voluntary account which allows NPS subscribers to invest and take out money anytime. One can invest in a Tier II account only if he has Tier I account.
The current income tax benefits on Tier 1 NPS accounts are as follows:
a) Deduction under Section 80CCD(1) is available to both salaried individuals and non-salaried individuals.
# Salaried individuals – Maximum deduction allowed is 10% of their salary for that year and;
# Non-salaried individuals – Maximum deduction allowed is 20% of gross total income for that year.
This amount is subject to the overall limit of Rs 150,000 in a financial year as per section 80C, 80CCC and 80CCD(1).
b) For salaried as well as self-employed, investment of up to Rs 50,000 in Tier I NPS account in a financial year qualifies for tax deduction under Section 80CCD(1B), which is in addition to the Rs 1,50,000 allowed under Section 80CCD(1).
# Overall, an individual can claim a maximum deduction in respect of his contribution upto Rs 200,000.
# In addition to the above, the benefit of an employer s contribution towards an employee s NPS account is allowed as a deduction under section 80CCD(2), subject to a limit of 10 per cent of the employee s salary.
For example – Salary structure of Anil is as follows:
The Pension Fund Regulatory Authority (PFRDA) has increased the cap on equity allocation from 50 per cent to 75 per cent.
Currently, on retirement or on reaching the age of 60, for NPS subscribers 40 per cent is to be invested in annuity plans without paying tax. Of the 60 per cent amount retained by the employee, 40 per cent can be withdrawn tax-free and only the balance 20 per cent is taxable. It is now proposed to exempt the entire 60 per cent withdrawal amount retained by the employee (requirement that the remaining 40 per cent has to be invested in annuity plans continues). This will result in lower tax liability for the individual in respect of the lump sum withdrawal at the time of retirement.
Example: If Rs 10,00,000 is the accumulated corpus in the NPS account at the time of retirement, you can withdraw up to Rs 600,000 in lump sum while the balance of Rs 400,000 has to be invested in purchasing an annuity. While only Rs 400,000 of the withdrawal was exempt (40 per cent of withdrawal) and the balance withdrawn of Rs 200,000 was taxable until now, the recent change will eliminate taxation on the balance withdrawal of Rs 200,000.
Other tax saving investments under Section 80C:
Equity Linked Savings Scheme (ELSS): One could consider investing in ELSS (with a lock-in of 3 years) through SIP and aligning it to long-term goals like children s education and retirement planning. Being an equity-linked product, it has the potential to provide higher returns as compared to other options eligible for investment under Section 80C, albeit with volatility from time to time. With the amendment in the Finance Act 2018 taxability of equity-related investments, the long-term capital gains above Rs 100,000 would be taxable and subject to grandfathering.
Public Provident Fund (PPF): PPF is one investment option that falls under the Exempt-Exempt-Exempt (EEE) category which means that contribution up to Rs 150,000 per annum, interest earned and the withdrawal amount is not taxable. However, the minimum tenure in PPF is 15 years, though premature termination (subject to penalty) and partial withdrawal is permissible after 5 years and 7 years of investment, respectively.
Sukanya Samriddhi Yojana (SSY): SSY aims at building a fund for girls education and marriage. Similar to the PPF, this scheme is also under the EEE category. An SSY account can be opened any time, from the day a girl is born, till the time she attains the age of 10. Withdrawal from the account is allowed when the girl child has attained 18 years subject to certain limits/conditions. Investment in the SSY scheme is eligible for deduction up to Rs 150,000 under Section 80C.
Unit Linked Insurance Plan (ULIP): The ULIP (lock-in period of minimum five years) is a financial product that offers the dual benefit of insurance as well as investment. Annual premium paid for ULIP is eligible for deduction under section 80C. Additionally, the policy payouts can also be exempt from tax under section 10(10D) subject to conditions.
Other key investment avenues are life insurance premium, National Savings Certificate, Senior Citizen Savings Scheme, 5-year fixed deposit with banks, etc.
Considering the above, NPS seems to be a better investment option from a tax perspective, with respect to the quantum of tax savings at the contribution stage, both for employer and employee s contribution, and at the withdrawal stage (in light of the proposed amendments).
(By Alok Agrawal, Partner, Deloitte India; and Mona Karnavat, Manager with Deloitte Haskins and Sells LLP)