Wednesday, August 3, 2011

Informative -- National Pension Scheme (NPS) or New Pension System


We have been hearing about National pension scheme or New pension system, this article will address as to what is NPS.

Lets understand pension first, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. In some countries they are also called as retirement plans or superannuation.

How does it work?

In case of government employees or public servants a part of their salary is contributed towards pension scheme provided from their organizations.  This individual contribution is administered by Employees Provident fund organization of India (EPFO). EPFO is a statutory body of government of India under Ministry of Labour and Employment which administers a compulsory contribution of Provident fund, pension and also an insurance scheme for Indian work force.

Superannuation or retirement pension is payable upon fulfillment of the below conditions:
1)      Completes 10 years of service
2)      Attaining age of 58 years.
Contribution made by the employee every month is invested in government securities ,fixed income securities and other debt instruments.

What is the National Pension Scheme (NPS)?
The NPS is a new voluntary contributory scheme introduced by Government of India through Pension fund Regulatory and development Authority (PFRDA) to promote savings for retirement or income on retirement. This is a purely a voluntary contribution scheme available to all the citizens of India other than those who are already covered under the pension scheme.  Under the NPS individuals who open retirement account will be provided by PRAN (permanent retirement account number) through PFRDA.

To an INDIAN citizen the following two types of accounts will be available:
1)      Tier 1 account: Citizen shall contribute savings for retirement into his non-withdrawal account.
2)      Tier 2 account: Citizen shall contribute savings for retirement. In this case he/she is allowed to withdraw whenever they wish.
Minimum contribution is Rs 500 per month or Rs 6000 annually. Minimum number of contributions is 4. One can invest in both Tier 1 account and Tier 2 account.

Every individual has a choice of investment type he/she wants to subscribe.

Active choice:  In this option the individual is allowed to invest in any of the mentioned below choice of investment option.
Ø  Asset Class E:  Invest in Equity markets up to a maximum of 50%.
Ø  Asset Class C: Investment in fixed income securities other than government securities like bonds.
Ø  Asset Class G: Investment in government securities.
An individual is allowed to invest the entire fund in C or G asset classes, or up to a maximum of 50% in Asset Class E and remaining in other 2 classes. 

Lifecycle choice:  In this option the investment will be made considering 3 major factors, Age, risk taking ability and planned retirement age. Refer the below mentioned table as to how the investor contribution will be invested.


Investment of the individual wealth or contribution
Age of individual
Asset class E
Asset class C
Asset class G
between 25 to 30 years
50%
30%
20%
Between 30 to 35 years
50%
29%
21%
36 years
48%
29%
23%
37 years
46%
28%
26%
38 years
44%
27%
29%
39 years
42%
26%
32%
40 years
40%
25%
35%
41 years
38%
24%
38%
42 years
36%
23%
41%
43 years
34%
22%
44%
44 years
32%
21%
47%
45 years
30%
20%
50%
46 years
28%
19%
53%
47 years
26%
18%
56%
48 years
24%
17%
59%
49 years
22%
16%
62%
50 years
20%
15%
65%

All this is managed by pension fund managers, ICICI pension fund management, IDFC pension fund management, KOTAK Mahindra, Reliance Capital, SBI pension funds, UTI retirement solutions and annuity service provider.
Once the investment is done NAV or Net Asset value of the contribution will be released at regular intervals, so that investor will be able to take an informed decision. On this basis an individual can switch from current portfolio. Currently only one switch is allowed in a year (NAV will be discussed in detail in my following blog).
The government through PFRDA charges .009% fee for managing your wealth. The charges are as follows:
Opening account charges Rs 50, Annual PRA (permanent retirement account) maintaining charges Rs 350, Initial subscriber registration charges for selecting either of the investment type mentioned above Rs 60, Custodian charges are at .075% pa deducted through NAV and finally the investment management fee of .009% pa deducted from NAV.

Tax advantage

This forms part of Sec80C of income tax act , where an individual is eligible for tax exempted upto Rs 1 lakh. 
Although upon withdrawal of the pension amount the interest component is taxable.


Think point: Does this sound like a Mutual Fund, Watch out for more on this space I will blog on Mutual funds in my next Post.



Tuesday, August 2, 2011

Basics on tax and its computation ( INDIA )



Most of my friends, colleagues complain about such a huge amount of tax being deducted from their salary component. I write this blog to give them a basic understanding of how the tax is computed and what they can do to reduce the amount of tax being deducted from their income or TDS (tax deducted at source).

What is TAX?
Tax is a compulsory contribution of a part of income to the government by either individual or a business entity or a product or by any activity. If a tax is directly levied on person or business entity then it is direct tax. If tax is levied on price of goods and services then it is called as indirect tax.
Purpose of tax is to finance government expenditure and public goods and services.
Before we understand how tax is calculated below mentioned information is important.


For General tax payers

Income tax slab ( Rs )
Tax
Income between 0 to 180000
No Tax
Income between 180001 to 500000
10%
Income between 500001 to 800000
20%
Income above 800000
30%

For Women employees

Income tax slab ( Rs )
Tax
Income between 0 to 190000
No Tax
Income between 190001 to 500000
10%
Income between 500001 to 800000
20%
Income above 800000
30%



Let’s consider an example of an employee named Mr. Zed who is earning an annual income of 600000. In simple words his salary is 600000 per annum. Now let’s compute and understand how much tax he needs to pay for the year 2011-2012. Let’s assume that he has not invested (LIC policy or tax exempted Mutual fund), nor has any housing loan or education loan. This is a plain vanilla example.


SI no
Gross salary
600000

Less professional tax deducted (200 * 12 = 2400)
2400

gross taxable salary
597600

Deductions as part of any investment done
(Sec 80 C , Sec 80 CCC , Sec 80 CCD , Sec 80G or Sec 80 E)
0

Total Taxable income
597600




Computation of tax

a)
As per the slab there is no tax on Rs180000
0
b)
As per next slab there is 10% tax on income
between 180000 to 500000
( 500000 - 180000 = 320000)
320000
c)
taxable income after deducting 180000
(597000 - 180000 = 417600)
417600
d)
Tax deducted on b or c whichever is lesser
( 320000 * 10%)
32000
e)
As per next slab there is 20% tax on income
between 500000 to 800000
( 800000 - 500000 = 300000)
300000
f)
taxable income remaining
(417600 - 320000 = 97600)
97600
g)
Tax deducted on e or f whichever is lesser
(97600 * 20%)
19520




Total tax payable for the year (19520 + 32000 = 51520)
51520

Tax payable monthly (51520 / 12 = 4293)
4293







Let’s consider an example of an employee named Mr. Red who is earning an annual income of 600000. In simple words his salary is 600000 per annum. Now let’s compute and understand how much tax he needs to pay for the year 2011-2012. Let’s assume that he has invested in PF 12000 has a LIC policy with premium 25000 has invested in Tax benefit mutual fund of 25000 and in government bonds for 25000 and in fixed deposit for 5 years for 13000. Lets compute and find out how much tax he pays as per the tax slabs.


SI no
Gross salary
600000

Less professional tax deducted (200 * 12 = 2400)
2400

gross taxable salary
597600

Deductions as part of any investment done
(Sec 80 C , Sec 80 CCC , Sec 80 CCD , Sec 80G or Sec 80 E)( 12000 + 25000+25000+25000+13000)
100000

Total Taxable income
497600




Computation of tax

a)
As per the slab there is no tax on Rs180000
0
b)
As per next slab there is 10% tax on income
between 180000 to 500000
( 500000 - 180000 = 320000)
320000
c)
taxable income after deducting 180000
(497000 - 180000 = 317600)
317600
d)
Tax deducted on b or c whichever is lesser
( 317600 * 10%)
31760




Total tax payable for the year
31760

Tax payable monthly (31760 / 12 = 2647)
2647





From the example mentioned we infere that by doing a right investment in to various tax savings instruments , be it pension fund , public provident fund , Insurance policies, fixed deposit for a period of 5 years , investment in government bonds and tax saving mutual funds we will reduce our tax burden. So Invest intelligently and wisely. Before investing try to always find a reason not to invest into particular scheme.

CHEERS

Comments Welcome