Here's how the five significant changes in the budget will impact your retirement savings
Your retrial savings could undergo a big change if you consider the five recent changes in the Budget. Of these, two are related to tax rebates and have a financial implication--an increase in the tax deductible limit from `1 lakh to `1.5 lakh for investing in a pension fund, and an additional deduction of `50,000 for investment in a pension fund notified under Section 80CCD, which currently is only the National Pension System (NPS).
Two other changes have a behavioural implication on how one builds a retirement corpus. These include the imposition of 10% TDS (tax deduction at source) on any premature withdrawal from the EPF (Employees Provident Fund), if the PAN is provided. If it isn't, the TDS is at the maximum marginal rate. The second allows an employee the choice between the NPS and the EPF. This will help him make a conscious choice on the basis of his risk profile rather than investing in a 100% debt oriented instrument. More importantly, such an option will result in the EPF raising its level of customer service. An amendment to the EPF & MP Act, 1952, will allow such a choice to the employee.
Lastly, the Budget has introduced a defined benefit pension plan with a regular savings programme, the Atal Pension Yojana, which will replace NPSLite (Swavalamban). A common thread running through these changes is that it strengthens the NPS, with the triple tax advantage making it the retirement vehicle of choice. The first benefit is the deduction of `1.5 lakh within Section 80C. Earlier, Section 80CCD(1) offered a deduction of up to `1 lakh, not exceeding 10% of the salary (basic + DA), or 10% of gross income for self employed.
The second benefit is under Section 80CCD(2), which provides a tax deduction for contribution by the employer up to 10% of salary. This is over and above the Section 80C limit of `1.5 lakh and there is no limit to the deduction that an employee can avail of. This is a significant benefit to employees but leaves out the self-employed as they cannot avail of it.
The third special benefit under Section 80CCD provides an additional tax deduction of `50,000, which is over and above the `1.5 lakh limit of Section 80C. Thus, the overall tax deduction that one can avail of is `2 lakh by combining both these deductions. This additional limit is applicable to both employees and self-employed.
However, before you invest in the NPS, consider the following points. Of the two NPS account options--Tier I and Tier II--the triple tax benefits are applicable only to the former, which is the pension fund account. Tier II is an optional account which offers complete liquidity and has no tax benefits. Importantly, don't rush to invest in the NPS in the current financial year since the additional benefit of `50,000 will be available only from the next financial year 2015-16 (AY 201617). You can also continue to utilise your Section 80C limit of `1.5 lakh in other instruments like the ELSS, PPF or housing loan principal payment and contribute only `50,000 to the NPS to take advantage of this additional limit. Finally, remember that the NPS gets the EET (Exempt-Exempt-Tax) taxation treatment. Here, the taxation on withdrawals is not limited to returns, but the entire withdrawal, including the principal component. This places NPS at a significant disadvantage to the other financial instruments and can reduce the retirement corpus. So, factor this in your calculations before you take the plunge.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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