#NPS Tier-2 account- Ambiguity on #tax treatment at the time of withdrawal of funds

Recently saw an article of Value research online about ," how one should use Tier- 2 account" of NPS as an alternate to mutual funds. 

While NPS is definitely a low-cost product, there is lot of ambiguity over taxation rules at the time of withdrawal.

For those who are not aware, NPS Tier-2 is an optional account over tier-1 which has no withdrawal restrictions like tier-1.
For investment allocation in tier -2, you can choose your investments to be in active choice mode or auto choice mode to be split across across Equity, Corporate bonds and Government bonds. (NPS Booklet)

Articles from the web on tax treatment at the time of withdrawal  of funds from Tier-2 account.

1. Tax Treatment of Tier II Account is similar to that of Debt Mutual Fund: On taxation front, as per the views from various CAs and tax consultants, the tax treatment on proceeds from Tier II NPS account would be similar to debt mutual funds. Indexation benefits can be availed of. (source)
2. Valueresearch article says, the taxation is the same as any other fixed income or debt alternative.
3. Tax angle from Mint  A crucial difference between the two accounts is the tax treatment. Says Rani S. Nair, executive director, PFRDA: “Since Tier II does not have any lock-in period, it does not qualify for a tax deduction under section 80C.” However, right now, the pension regulator is divided on the tax treatment of the amount withdrawn. Says Nair: “We are yet to hear from the tax department on the tax implications.” Going by the product structure, withdrawals will attract capital gains tax. Withdrawals before one year will attract short-term capital gains that is taxed at the marginal rate (the highest tax rate on your income slab). For withdrawals after one year, you will have to pay long-term capital gains—10% for debt funds and nil for equity funds.

Some articles talk about

• Treatment of the whole amount as "debt"- while others talk  about 
• Separate tax treatment for withdrawal from equity and debt portion of tier-2 account. ( Tier 2 withdrawal request online on CRA NSDL provides the option of  lump sum or scheme wise withdrawal- so you can actually withdraw from Equity or Corporate or Government units specifically)

So, as another article says

The problem is the ambiguity over taxation. "There is no clarity on tax treatment of Tier II NPS returns. It is very subjective and different people have different views on the matter.

So, Lets keep our fingers crossed till any formal judgment is out. Please leave a comment ,if you have any valid input.

# PPF account, the must have for every investor

Public provident fund is one of the best investment tools that provides safety, compounding and tax benefits in one package. This should be the first investment that one gets into immediately after turning 18. The account is meant for a period of 15 years but can be extended by 5 years @ tenure expiry.

The safety of government assurance and the compounding effect will definitely take care of your retirement needs. You can invest up to 12 installments a year and up to 1 lakh in this account every year. You should try to invest the maximum amount possible in PPF account every year.

The following articles provide a great insight into " why investing in PPF is a must?"

20 must knows about PPF

6 great reasons to open a PPF account

PPF account can be opened at SBI bank branches or at your nearest post office. Selected ICICI bank brnaches also provide PPF account facility.

Quick guide to open PPF account

If you are looking for comparing PPF with EPF and NPS, here's another  write-up.

Comparing NPS fund performance

The above table reflects the returns from various NPS funds - source PFRDA website.

The column " Auto" is added for getting the best fund considering a mix of  equity, government and corporate  investment schemes. ( Proportion assumes Equity -50% , Corporate - 30%, Government bonds- 20%).

Read the " Colours" in each of the column to reflect the lowest ( red) to highest return ( green).

NPS fund performance and NAVs

If you are having an NPS account and want to know the latest NAV and fund value for your tier-1/2 account , you may login to the  NSDL website

If you want to compare or have a look at NAVs of the schemes run by all the fund managers ( PFM- Pension Fund Manager), then the  following link might be useful.

https://www.npscra.nsdl.co.in/nav-search.php


When you are on the webpage ,Choose  the PFM from the list of values  to see the NAVs of all the  schemes manged by the PFM.

New Pension Scheme

New pension scheme is one of the less marketed investment tools. Of course, no one will market a tool aggressively when the commission is less but offers great value to customers.

What is NPS?

Advantages of  NPS tier 2 account.

Here's a good write up on NPS published on money control today.

NPS to save additional tax

Be ready with your NPS account ! if your employer is convinced, you may start getting additional tax benefits.

http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/you-can-save-additional-tax-through-nps/articleshow/11753274.cms


To know more about  NPS, click here

Info on EPFO

ET carries an article today about provision of monthly slips with PF balances to contributors every month from EPFO ( Employees provident fund office). This seems to be the step in right direction. As of now, things like transfer, withdrawal, inquiry are not as transparent or as swift as they should be.

Whenever I have tried to transfer my PF ( when I have changed employers), I have really had a tough time. When a query is made to the PF offices concerned ( From and To PF offices), both of them point to each other or they say that they haven't received the form yet. This in spite of the fact my employer assuring that the form has been sent.

( You can use this link to register your EPF grievance)

Such loopholes and lack of transparency with one's money is definitely painful. They should try to emulate the NPS website  in terms of providing all information to subscribers online.

Now when the new government employees pension funds are managed by NPS ( Funds managed by six private funds), the EPF funds of private employees is managed by EPFO ( government organization).

In the long run, these organizations / schemes should be clubbed together for efficiency and everyone should have an unique identifier to manage his pension funds ( PRAN Number probably or UID
), irrespective of where he works and change of employment.

We have a long way to go!

Here's the link of the ET article mentioned above.

Some practical difficulties with NPS

There are some practical difficulties with NPS which I figured out as an investor. Probably this problem might have been aggravated by my POP too.

1) My contribution to tier-1 or 2 takes more than one week to find it's way to my account as units. In fact, one of my latest contribution was a month back and I am yet to see the units in my account. The cheque was cleared by the POP long back.

I am waiting to hear from the CRA NSDL grievance cell on the complaint made in this regard.

( This should become seem less like MF. If they receive the cheque on a particular day, I should be sure of getting the  units as per the  days NAV- subject to cut off time). We really have a long way to go here.

2) I have been contributing to tier -2 with fund management A. I wanted to re-direct only the future contributions to fund B having the previous units with fund A. Unfortunately, this doesn't seem to be possible .

If I give a switch request from fund A to B,then all my existing contributions plus the future contributions would be directed to fund B.

This seems like a limitation to me.

Hope as more and more people get into the bus, things should get better ( and not other wise :-) )

NPS performance

If you have been wondering about the performance of the six fund managers in NPS, you may find the following link useful.

The Equity funds seems not be be aggressively managed. if you had a higher equity allocation( 50%) your return might be lesser than a conservative investor in a period where equities have done fairly well.

Anyhow, it's too early to judge the performance with this sample.

One thing missing in the article is that there is no specific mention of tier-1 or tier-2 funds when discussing fund performance.

Here goes the link.

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/can-you-retire-with-the-nps/articleshow/7436644.cms

Taking care of your retired life!

Not long ago ( may be until a decade ago), a government job was considered a coveted one.  Now those jobs are not seen as the 'in' thing. Remuneration in government jobs have also gone up significantly and still there are thousands who chase them. But the 'charm' has definitely waded a lot.

The reason that these jobs had a good social standing because of the 1. Work life balance offered 2. Decent remuneration ( Private sector salaries were not sky high those days) 3. Job security and not to forget 4. Pension.

National Pension System ( NPS) - potential saving and investment tool

National Pension System tier- 2 account seems to be a good investment option. While the tier- 1 account is a rigid in terms of withdrawal ,etc, Tier -2 seems to be a good option.

The New Pension System (NPS):

Welcome to the new world of investing for the future.
Till now the unorganized sector did not have any pension plans, to enable them to save for the future. Why there was no social security system of savings out of salaries/trading income and even Provident fund scheme remained a distant dream for them. Going with the PPF , it is only organized and white collar employees had invested in PPF.

PFRDA - Looks like a great start , Good option for all

PFRDA would be good scheme for everyone to enrol. The option to invest in equity is a win-win situation. It can potentially increase the equity penetration in India which is very low and the investor may benefit from the higher earning potential of equity. This is definitely a BIG first step. All of us must seriously consider this. With exemption for investment available under 80c and governtment planning to exempt the returns from tax ( like PPF,EPF and GPF), this seems an attractive option.

FAQ on PFRDA-

http://economictimes.indiatimes.com/Personal-Finance/Frequently-asked-questions-on-new-pension-scheme/articleshow/4472238.cms

News - Source ET "The pension fund regulator, which is extending the new pension scheme (NPS) to everyone in the country on Friday, will review the 50% Monitor your financial healthAchieve fin goals with proper planning limit on investing people’s savings in equities a year from now.
The Pension Fund Regulatory Development Authority (PFRDA) has now stipulated that only half of an individual’s savings can go into equities even if he opts for a high-risk high-return investment. The auto (default) choice for persons who do not make an investment choice also caps the equity exposure at half of the savings.
A committee chaired by HDFC chairman Deepak Parekh that advised PFRDA in framing the investment norms had recommended that risk-hungry subscribers should have the freedom to invest all their savings in equities. It had also recommended a 65% equity exposure for auto choice. Investment in stocks is considered appropriate for long-term investments such as pension plans.
PFRDA chairman D Swarup told ET that the equity exposure limit was reduced based on the recommendations of the board of trustees of the NPS and the advice of the government. “This cap would be reviewed after a year. The Deepak Parekh panel had also recommended a review of the investment pattern after one year,” he said. Besides, the world over, pension plans do not allow 100% equity investments. In the US, equity exposure is allowed in the range of 50-70%."

(http://www.pfrda.org.in/)

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