Set to become more attractive

A day after the Union Budget 2011-12, certified financial planner Suresh Sadagopan is busy attending calls on new investment avenues, which have been opened up by the finance minister. For salaried individuals, one of these could be the new pension scheme (NPS).

On Monday, Pranab Mukherjee announced that employers’ contribution towards NPS can be shown as an expense. That is, their contribution will get tax benefits under Section 36. In addition, the employers’ contribution will no longer be a part of Section 80C.

It, effectively, means that employees can invest more in 80C instruments.At present, employees claim tax benefits under Section 80CCD for contributions made towards NPS by both him/her and his/her employer. But since these investments are clubbed with those made under Section 80C and Section 80CCC, the maximum investible amount is capped at Rs 1 lakh.

“With the employer’s contribution not being considered as part of 80C investments, the employee could increase his own investments under 80C. But then, most salaried individuals exceed the deductible amount under Section 80C by a huge margin, anyway,” says Sadagopan.

But not everyone thinks of NPS as a viable investment option. “The tax benefit is only restricted to 10 per cent of the employer’s contribution to the employee’s basic salary,” says financial planner Arnav Pandya.

So, if one’s basic salary was Rs 30,000, the maximum an employer could consider as an expense would be Rs 3,000. Financial planners generally recommend NPS for those who do not have a pension option from their employers. Investors could choose to invest in either of the three options — government securities, debt or equity, depending on one’s risk profile.

“The move should make NPS popular from the next financial year rather than waiting for the Direct Taxes Code which if enacted, according to the current draft, is expected to make NPS popular from the financial year beginning April 1, 2012, ”says Harsh Roongta, CEO, apnapaisa.com.

However, there are several restrictions on Central and state government employees participating in NPS. Whatever their total contribution, they can claim tax deduction on only 10 per cent of their salary. According to Sadagopan, one major negative that works against NPS is that like all annuities, depending on the tax slab one comes under, the amount will be taxed on maturity.