Everything You Need To Know About Tax Saver via NPS

Since the Finance Minister offered additional tax benefits for contributing to the National Pension System (NPS), the number of subscribers has increased significantly. The NPS is a defined voluntary retirement scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Under this system, subscribers must open a Tier I account and invest at least INR 6,000 per year until the age of 60 years. They may opt to invest additional money in a Tier II account. On maturity, investors are allowed to withdraw up to 60% of the accumulated amount as a lump sum. The balance must compulsorily be converted to an annuity plan to earn regular income during the post-retirement years.

pension

 

Every investor receives a Permanent Retirement Account Number (PRAN) on successful application. In case, an individual does not receive this unique number, he or she may check the PRAN status on the regulator’s site or with the Point of Presence (POP). POP is a PFRDA- approved institution where the NPS account is opened.

Tax savings with NPS

Section 80CCD (1)

Subscribers are able to enjoy tax deductions of up to INR 1.5 lacs under section 80CCD (1) of the Income Tax (IT) Act. This section is applicable for availing tax benefits for investments made in a government-notified pension plan. In addition to the NPS the plans include Public Provident Fund (PPF) and insurance policies. The limit under this section was enhanced from INR 1 lac to INR 1.5 lacs, which provides investors the opportunity to enjoy additional tax savings.
The cap for employees under this section is calculated as 10% of basic salary plus dearness allowance. Self-employed subscribers may avail tax benefits under this section for an amount capped at 10% of their gross income.

Section 80CCD (1B)

In the previous year’s budget, the Finance Minister offered a boost to NPS by announcing an additional tax benefit for contributions made to this defined plan. Section 80CCD (1B) of the IT Act offers investors the chance to avail additional tax deductions of up to INR 50,000 per year on their NPS contributions.

The combined NPS tax benefits are advantageous for taxpayers in the highest (30%) bracket. They can save an additional INR 15,450 in taxes [under section 80CCD (1B)] by contributing INR 50,000 to their NPS account.

Section 80CCD (2)

Contributions made by the employers in their employees’ NPS accounts are eligible for tax benefits under section 80CCD (2) of the IT Act. This amount is capped at 10% of the basic salary plus dearness allowance.

Maturity

Since its launch, NPS has been categorized as an Exempt-Exempt-Taxable (EET) scheme. This means the annual contributions made to this scheme and the interest earned are both tax-free. However, investors have to pay taxes as per their tax slabs at the time of maturity.

In Budget 2016, the Finance Minister has relaxed the tax on maturity. As per the revised regulations, 40% of the lump sum withdrawal on maturity is now tax-free. If the subscriber opts to withdraw more than 40% of the accumulated corpus, the difference is taxable at the prevailing tax rate. The amount converted to an annuity is tax-free; however, the income through this plan is taxable in the year it is received. The annuity income can be calculated using a pension calculator.

The PFRDA in October 2015 has further provided benefits for NPS subscribers. Subscribers may now withdraw the lump sum amount in 10 annual installments until the age of 70 years. Using this modification wisely may benefit subscribers in further tax savings.

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Baby boomers face a retirement savings downfall – Vital tips to retire rich

As we come to the beginning of 2016, majority of the Americans say that they’re focused towards increasing their retirement savings fund. But if you take a look at how much they’ve actually taken action according to their words, you will see that they’re far from reaching their goal last year. As per a new report by Black Rock, the average baby boomer shares the same goal of accruing enough of their retirement savings to have at least $45,000 a year in the form of retirement income. However, to the utter shock of the researchers, the average retirement portfolio shows that they have just $135,200 in it which means an average estimate income of around $9,125. This amount would leave the average baby boomer with nearly $37,000 short of his retirement savings goal per year.

retirement savings

The truth is that the so-called ‘nest-egg’ of the retirees is broken and they don’t know where to invest and where not to. One of the main problems of the baby boomers is that they’re extremely conservative about their investments. The average American retirement portfolio consists of cash (65%) which is not at all enough to offer the kind of growth which is needed to boost their investment goals. Around 4 among 10 investors are of the opinion that they wished to have cash saved in the form of security cushion before they can think of investing their dollars for the sake of investing.

Retiring early and yet being wealthy – Do you understand the principles?

Whether you believe it or not, building your financial safe for achieving a financially secure retirement is indeed very simple. In fact, the equation for fiscal success is the combination of 3 easy-to-comprehend principles:

  • The total amount of money that you invest
  • The total growth rate of your money and
  • The amount of time that your funds take to grow

However, it is pretty unfortunate to note that very few people actually succeed in building their financial safe before their retirement as they simply don’t understand the above mentioned 3 principles. The challenge isn’t only in the knowing them but it is rather in turning the knowledge into meaningful upshots. Retirement planning is nothing similar to rocket science and hence you have to invest your time and wisdom to judge and make informed and wise decisions about saving money and simultaneous investing.

6 Golden rules which will help you retire rich

1) Spend less than what you make in a month

The primary formula of retiring rich is actually putting more money into the bank as Social Security money isn’t the only cushion which can help you lead a prosperous life after retiring. Experts recommend people to spend 90% of the money that you make in a month and keep aside the remaining 10% in the bank account. In case you have 0 savings in your bank account, make sure you first concentrate on creating an emergency fund.

2) The earlier you start saving, the better

Thanks to the rule of compound interest, even a little money that you save now can help you in a huge way during your retirement. But in order to reap the most benefit, you should start saving as early as you can. If you’re 20 years of age and you still think you can put in money to your retirement fund, you should do so as this is the best way in multiplying your savings till the time you retire. On the other hand, if you wait until 40 to start saving $100, you would be saving much less. So, start saving as early as possible.

3) Start contributing money to your 401(k) account

If you’re working, you will definitely get the benefit of a 401(k). Don’t ever make the mistake of not contributing money to this account as this is what shapes your post-retirement future. Based on your income, decide on the amount that you want to continue saving so that you can keep running your family and meeting all your necessary and discretionary expenses every month. Make a wise decision when choosing the amount.

4) Don’t leave any free money

If someone wished to hand out $100, would you deny him? That is exactly what you should follow when you receive free money from your employer for contribution to the 401(k) account. Most employers will offer you a matched contribution and you should gladly accept it. This will indeed enhance your retirement savings and will help you a lot in the near future.

5) Remain informed about what you invest

Don’t make the mistake of being dumb with regards to your investment. You may take the smart risk of investing in the emerging market but a dumb move might make you pour all your savings in vain. In case you think that you can’t take care of your investment on your own, you should hire an investment planner who can take care of your investment assets and make sure you earn profits. Always weigh your options so that you know that you’re taking the right step.

6) Work for a longer time

Although you can file for Social Security benefits when you reach the age of 62, you will definitely get a lot more money when you wait till the age of 70. When you hit the full retirement age, you can achieve an 8% increase in the benefits every year. However, ensure that you file right at the age of 70 as you won’t get any extra benefit for waiting after that particular age.

Look for different ways of increasing your income as without this, you might not be able to increase the amount you save. Live within your means and don’t splurge during the holidays as this will leave you with a financial hangover which will continue till the New Year. Look for a raise in your monthly income and work hard to achieve all your goals.

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