National Pension System

NPS (National Pension System) is a govt. sponsored pension scheme. Since its launch, it has seen many changes. There are many questions come in one's mind when one considers investing in NPS. In this short guide you will get answers to lot of your NPS related queries. Hope you will find this guide useful.

21 Point Guide to NPS

1. While opening NPS account, an individual (of age between 18-65) can get only one PRAN (Permanent Retirement Account Number).
    
2. An NPS subscriber must first open a Tier-1 account. If she wishes, later she can open a Tier-2 account also. But without opening a Tier-1 account, one cannot apply for a Tier-2 account.
    
3. Tier-1 account is meant to accumulate money over long term for retirement goal.
    
4. Tier-2 account can be considered as liquid version of Tier-1 account. From Tier-2 account one can withdraw as many times without giving any penalty fee. Investing in Tier-2 account does not offer any tax benefit though. 
    
5. One cannot transfer money from Tier-1 account to Tier-2, but reverse is allowed.
    
6. Withdrawal options from Tier-1 account is limited. There can be either ‘partial withdrawal’ or ‘full withdrawal’.
    
7. Partial withdrawal from Tier-1 account can happen only after 10 years of subscription is over. The maximum amount which is allowed to be withdrawn in case of ‘partial withdrawal’ is 25% of the contribution amount. So, if your investment of amount of Rs. 5 lakhs in NPS becomes 7 lakhs after 10 years – then you can withdraw maximum Rs. 1.25 lakhs (25% of 5 lakhs). Such partial withdrawal amount will not be taxed.
    
8. Partial withdrawals from Tier-1 account is allowed only if there is a valid reason like – higher education or marriage of children, purchase or construction of residential house, treatment of specified diseases.
    
9. Maximum 3 partial withdrawals (from Tier-1 account) is allowed during the entire tenure and there must be minimum gap of 5 years between 2 withdrawals (in cases of treatment of specified illness this ‘minimum gap’ clause is waived off).
    
10. Full withdrawal from Tier-1 account can happen (a) on retirement at the age of 60 (b) before retirement (c) upon death of subscriber.
     
11. Maximum amount that can be withdrawn at the time of retirement is 60% of the accumulated wealth and balance 40% needs to be utilized for the purchase of annuity providing monthly pension to the subscriber. Out of this 60% of the accumulated wealth, 40% is exempt from tax. Say, for example at retirement Mr. A buys annuity of Rs. 40 and accumulates Rs. 60 then he will pay tax on Rs. 20 only. If Mr. B buys annuity of Rs. 60 and accumulates Rs. 40 then he will not pay any tax. Income from annuity will be taxable though.
     
12. If one makes full withdrawal from Tier-1 account before retirement, then compulsorily he will have to buy annuity by 80% of the amount. Rest 20% can be accumulated and will be exempt from tax.
     
13. The amount withdrawn in the event of death of subscriber shall be exempt from tax. The entire accumulated pension would be paid to the legal heir/nominee of the subscriber. However, in case of govt employees, the entire amount cannot be withdrawn. Purchase of annuity plan is mandatory by the nominee.
     
14. If the total amount at the time of retirement is less than Rs. 2 lakhs then entire amount can be accumulated.
     
15. NPS offers 2 types of investment choices – Active Choice and Auto Choice.
     
16. Under ‘active choice’ you can choose from 3 different asset mix. These are ECG. E class of asset mix has maximum 50% allocation to equity and rest 50% to corporate bonds and govt. securities. C class of asset mix has 100% allocation to corporate bonds. G class of asset mix has 100% allocation to govt. securities. One can change investment option and asset allocation ratios twice in a financial year. 
     
17. Under ‘auto choice’ asset allocation will happen automatically as per age of the subscriber. 
     
18. There 7 fund managers currently managing NPS funds. They are from SBI, LIC, UTI, ICICI, Reliance, Kotak and HDFC.
     
19. Investment up to Rs 1.5 lacs into NPS in a financial year is eligible for deduction under Section 80CCD(1). Please note this deduction comes under the overall ceiling of Rs 1.5 lacs for deduction under Section 80C. 
     
20. Up to Rs 50,000 per financial year for any investments into NPS under Section 80CCD (1B). This deduction is over and above the ceiling limit of Rs 1.5 lacs provided under Section 80C. Or in other words, if one exhausts the entire limit available under 80C, then only this section will become applicable.
     
21. Though one can join NPS till the age of 65, but after joining one can contribute till the age of 70.

WHAT ARE LIQUID FUNDS? HOW DO THEY WORK?

Liquid cash is usually deposited in the savings bank deposits. But as the name suggests, a savings account is not an investment account and thus, the deposited money doesn’t earn much interest. Customers save their liquid cash in their bank account as the amount is accessible anytime.

Well, isn’t it wonderful if there is an investment vehicle that allows liquidity besides providing some returns? One such investment vehicle is ‘liquid mutual funds’. Experts suggest parking 1 month’s expenses in the savings account and 3 to 6 months expenses in a liquid mutual fund, so that the money grows money.

What Are The Benefits Of Liquid Mutual Funds?

Liquid funds are debt mutual funds that invest your money in short-term market instruments such as government securities, treasury bills, and call money. Benefits from the liquid mutual funds include:

• The earnings earned through dividends are tax-free.
• Post-tax returns after dividend distribution tax are better than the returns from the savings account.
• No exit load on the redemption of liquid funds done overnight.
• Liquid funds provide the discipline of not keeping excess unproductive money with self.
• They contribute to long-term investment goals.
• The best part is even while you rest, your money does not.
• Liquid fund investments are considered least volatile as they are invested in instruments with high credit rating, hence least risky.
• Investors can redeem and get the money in their bank account on the next working day of the redemption.

When Can You Invest In Liquid Mutual Funds?

If you have a short time period to make an investment, it is better to park your money in liquid funds as they invest in instruments up to a maturity of 91 days. Park your money for short periods ranging from 1 day to 3 months.

Thus, it is better to park excess liquid cash in channels that help earn better returns at the same time provide liquidity. Returns from the liquid mutual funds are usually higher than the returns from bank savings account. Take wise money decisions to let your money earn more money. For more advice u can contact Money Farmers.

THINGS TO CONSIDER BEFORE BUYING LONG-TERM ANNUITY

The mere thought of running out of money during retirement seems scary. So looking out for the income sources that keep us going during the retired phase gets crucial. One such investment product that turns your invested money into a regular source of income is an annuity. Here are major factors to consider before buying a long-term annuity product.

Returns & Restrictions: Earlier, immediate annuity products used to offer comparatively lower returns. Now, the returns being offered by the annuity products are comparable with that of others. Additionally, an annuity offers guaranteed rates for life, whereas most products in the market come with the restriction on the tenure or maximum deposits.

Safety & Age: Older investors look for assured-return products like annuities. Debt mutual funds can also generate similar returns but accompany risks. Thus, annuities may be beneficial as retirement income. Coming to the age, the rates move up with age for the return of premium annuities. Thus, the decision to lock in should be taken based on the available rates and age. Younger investors should also consider the issue of taxability.

Diversification & Taxation: Never put all the eggs in one basket. Guaranteed annuity for life may be a positive feature but do not invest everything in it. Diversification is important to rule out deviations in the interest rate. Lock no more than 50% of your retirement corpus in annuities and the rest 50% in other instruments. As the annuity amount is treated as pension, marginal taxes are levied on them. And the annuity includes a part of the principal, so even that is taxable.