NATIONAL PENSION SCHEME: AN EFFECTIVE TOOL FOR SAVING TAX Dr.Charu Malhotra 1, Ms.Vaijayanti Anand 2 1 Assistant Professor, Institute of Technology & Science, Ghaziabad 2 Assistant Professor IIMT, Greater Noida Tax planning is an essential part of financial planning of every individual. Efficient tax planning enable store duce the tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions, rebates and allowances while ensuring that investment share also inline with long-term goals. The purpose of the study is to find the emergence and effectiveness of National Scheme as the most suitable tax saving instrument used to save tax along with realisation of long term goals by beating double digit inflation. National Scheme(NPS) is a government approved pension scheme for Indian citizens in the 18-60 age group. While central and state government employees have to subscribe to NPS (it s compulsory for them), it s optional for others. Overall findings revealsthat it is the effective tool in the hands of investor for realisation of long term goals along with tax saving. Keywords: Tax, Tax planning, National Scheme, Government Employee, Inflation, Long term goal I. INTRODUCTION The direct tax,which is paid by an individual on the income earned by him to the central government of India, is known as Income Tax. It plays a vital role in the economic growth and stability of our country. For years, the government is generating revenue through this tax system. As in other countries, India also has an established system of taxation under the provisions of Income Tax Act, 1961.In case of individual taxation, government has offered few schemes in which the investment are not subjected to tax liability. Indian Government from 1st January,2004 has made it compulsory for new government employees (except armed forces) to contribute to National Scheme(NPS)with matching contribution by government. NPS is regulated by s Development Regulatory Authority (PFRDA). This is a move of the Government from a defined benefit pension to a defined contribution based pension system. Since 1st April, 2008, the pension contributions of Central Government employees covered by the National System (NPS) are being invested by professional Managers in line with investment guidelines of Government applicable to non-government. At present there are seven fund houses for NPS:HDFC, ICICI Prudential, Kotak, LIC, Reliance Capital, SBI,and UTI Retirement. II. REVIEW OF LITERATURE Soma sundaram (1998) invest in small savings scheme in future provided they have more for savings. It has found that bank deposits and chit funds were the best-known modes of savings among investors and the least known modes the Unit Trust of India(UTI) schemes and plantation schemes. Attitude of investors were highly positive for saving for future needs. Securities, Exchange Board of India (SEBI),and NCAER(2000), 'Survey of Indian Investor has reported that safety and liquidity were the primary considerations, which determined the choice of an asset. Ranked by an ascending order of risk perception fixed deposit accounts in bank were considered very safe, followed by gold, units ofuti-us64, fixed deposits of non-government companies, mutual funds, equity shares, and debentures. Das Kanti Sanjay (2012) studied the middle class household s investment behaviour and found that the trends of investment by house hold sare not similar in nature and they vary between sever all financial instruments. The study reveals that amongst other avenues the bank deposits remain the most popular instrument of investment 264 P a g e
followed by insurance and small saving scheme with maximum number of respondents investing in fixed in come bearing option. Chaturvedi Meenakshi & Khare Shruti (2012) studied the Saving Pattern and Investment Preferences of Individual House hold in India found out that most investors preferred Bank Deposit as the first choice of investment and next to bank deposits small saving schemes constitutes the second choice of investment. GeethaN, & Ramesh M. (2012) studied the Relevance of Demographic Factors in Investment Decision and reveals that there is significant relationship between the demographic factors such as gender, age, education, occupation, annual income and annual savings with the sources of awareness obtained by the investors. Shaik Pasha Majeeb Abdul, Murty Dr.T.N., R. Vamsee Krishna, Gopi Kiran V.Hemantha (2012), the study examines that the level of importance assumed by there tail equity investor son various investment objectives based on the socio economic variables and selective investment profile factors. With the help of average score analysis with the help of Kruskal Wallis H- Test found out that the investors attach/attract more importance to liquidity, quick gain, capital appreciation and safety inequity investments compared to others. Bhat Abass Mohd, Dar Ahmad Fayaz (2013) studied the role of emotions in individual investment behaviour describe and conduct a research on what factors, investing characteristics, and decision-making processes affected individual investors and analysed the emotional factors that are in the back of an investor when he makes an investment decision. Kumaran Sunitha (2013) has explored whether there was a link between an individual s personal epistemology, such as Locus of Control, and the mechanism of stock market decision-making (using gambler s fall acyversu shot-outcome). The primary out come of the paper, has confirmed that an individual s personal epistemology does have an effect on the investment decisions. III. OBJECTIVE The study is conducted to analyze the effectiveness of National Scheme as a tax saving instrument along with realization of long term goals by beating the inflation. IV. METHODOLOGY Mainly secondary data from various newspapers and websites is used to study the return given by the National Scheme in all the the three options idea) TIER I Equity Plans b) TIER I Government Bond Plans c) TIER I Corporate Debt Plans is taken into consideration. of three months, six months and last one year is taken into consideration. National Scheme is an approved pension scheme by government for individual in the age group of 18-60 years. This scheme is compulsory for government employees (except armed forces) but even a non government employee can invest in National Scheme either as an individual investor or through the organization in which he works. For corporate houses, contribution to NPS is in addition to investment in Employee Provident. Under NPS, two types of account would be available to people Tier I : contribute into the pension account with restrictions on withdrawal. Tier II: a voluntary saving account from which one is free to withdraw whenever he wishes. An active Tier I account is a pre requisite for opening of a Tier II. The government and employers will make no contribution to this account. In NPS money contributed is invested in the following category of assets: E- Equity Market instruments G-Government securities C-Fixed income securities other than Government such as liquid funds, corporate debt, fixed deposits. Investment in NPS is either in Active mode where investor will himself manage the distribution among various asset class (EGC) or in Auto mode where the investment in various asset class (EGC) is based on the age of investor. At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in E Class, 30% in C Class and 20% in G Class. From age 36 onwards, the weight in E and C asset 265 P a g e
class will decrease annually and the weight in G class will increase annually till it reaches 10% in E, 10% in C and 80% in G class at age 55. Once the mode is decided then the money is managed by HDFC, ICICI Prudential, Kotak, LIC, Reliance Capital, SBI,UTI Retirement. The fund manager is also opted by the account holder. The accounts of government employees are managed by one of the three government fund managers: LIC Plan, SBI Plan and UTI Retirement. The money invested by others is managed by one of the following fund managers, ICICI Prudential, HDFC, Kotak, Reliance Capital, SBI s and UTI Retirement. V. INCOME TAX PROVISIONS FOR INVESTMENT IN NPS Section Deduction allowed Maximum Limit Can be claimed by 80CCD(1) Employee Up to 1.5 Lakhs Employees. For selfemployed contribution up to including 80C. 10% of their 10% of basic salary annual income up to a and DA maximum of 1.5 Lakhs. 80CCD(2) 80CCD(1B) Employer s contribution up to 10% is basic salary and DA. Additional tax benefit up to 50000 over and above the benefit under 80CCD (1). TIER I-EQUITY PLANS NAV (in %) 3-Month Upto 10% of basic salary and DA. Upto. 50000 Only employees. Self employed cannot take this benefit. Employee (Government or private) or selfemployed or ordinary citizen. Assets (in Rs Crores) HDFC 18.60 9.06 17.53 22.26 506.9 ICICI Prudential 25.25 7.07 15.87 18.51 574.5 Kotak 23.51 8.73 17.26 19.94 100.3 LIC 16.62 6.07 13.48 16.85 232.0 Reliance Capital 23.61 7.71 15.83 18.50 60.4 SBI 21.66 7.94 15.85 19.58 1078.7 UTI Retirement 24.96 6.91 15.54 19.13 139.5 NIFTY 50 Index - 8.30 17.02 17.85 - (Table 1) 266 P a g e
TIER I-GOVERNMENT BOND PLANS NAV(in ) 3-Month Assets Crores) HDFC 15.46 6.11 1.52 14.62 405.6 ICICI Prudential 20.83 6.12 1.16 14.51 439.9 Kotak 20.80 6.36 1.63 15.18 92.7 LIC 16.31 6.85 4.20 17.54 186.1 Reliance Capital 20.29 6.29 1.69 14.98 57.8 SBI 22.43 6.02 1.87 14.67 1307.5 UTI Retirement 20.40 6.06 1.56 13.98 130.0 CCIL All Sovereign Bond-TRI - 5.33 1.81 13.35 - (Table 2) TIER I-CORPORATE DEBT PLANS NAV(in) 3-Month Assets Crores) HDFC 15.50 4.43 3.99 12.64 309.2 ICICI Prudential 23.79 4.13 3.56 12.84 380.4 Kotak 23.79 4.83 3.72 13.24 71.0 LIC 15.54 4.64 3.64 12.24 142.4 Reliance Capital 21.45 4.27 3.80 12.78 40.7 SBI 23.90 4.58 3.65 12.64 728.4 UTI Retirement 21.66 4.45 3.67 12.37 86.4 CCIL Bond Broad- TRI - 4.24 2.07 12.01 - (Table 3) (s as on June 09, 2017. Assets as on April 30, 2017) Source: Value Research VI. DATA ANALYSIS The above mentioned tables have data with respect to Net Asset Value (NAV), return from the various pension funds in the last three months, six months and one year. Data is also collected with respect to Assets under management in the fund houses.table 1 deals with TIER I- Equity Plans, Table 2 deals with TIER I Government Bond Plans, Table 3 deals with TIER I- Corporate Debt Plans. From the analysis of Table 1 it is concluded that the three month return ranges from 6.07% LIC - 9.06% HDFC with an average return on nifty at 8.30%.Six month return ranges from 13.48% LIC - 17.53% HDFC with an average return on nifty at 17.02%. One year return ranges from 16.85% LIC 22.26% HDFC with an average return on nifty at 17.85%. Asset under corpus of SBI is maximumi.e. 1078.7 crores. From the analysis of Table 2 it is concluded that the three month return ranges from 6.02% SBI 6.85% LIC with an average return on CCIL All Sovereign Bond-TRI at 5.33%.Six month return ranges from 1.16% ICICI Prudential - 4.20% LIC with an average return on CCIL All Sovereign Bond-TRI at 1.81%. One year return ranges from 13.98% UTI Retirement 17.54% LIC (in (in 267 P a g e
with an average return on CCIL All Sovereign Bond-TRI at 13.35%. Asset under corpus of SBI is maximumi.e. 1307.5 crores. From the analysis of Table 3 it is concluded that the three month return ranges from 4.13% ICICI Prudential 4.83% Kotak with an average return on CCIL Bond Broad-TRI at 4.24%.Six month return ranges from 3.56% ICICI Prudential - 3.99% HDFC with an average return on CCIL Bond Broad-TRI at 2.07%. One year return ranges from 12.24% LIC 13.24% Kotak with an average return CCIL Bond Broad-TRI at 12.01%. Asset under corpus of SBI is maximumi.e. 728.4 crores. VII. FINDINGS From the above data analysis it is hereby concluded that return on National Scheme is far better i.e. 16.85% per annum-22.26% per annum on equity plans, 13.98% per annum -17.54% per annum on government bond plans and 12.24 % per annum - 13.24% per annum on corporate debt plans. This return is much higher than the return offered on various other peer investment options i.e.public Provident 7.9% per annum, Five year Time Deposit 7.7%per annum,kisanvikaspatra 7.6% per annum, National Saving Certificate 7.9% per annum & Employee Provident 8.65%. Hence, in order to achieve long term goals along with effective tax planning National Scheme has emerged as one of the best options available with the investor. VIII. SUGGESTIONS It is suggested that suitable measures is to be taken from the side of government & fund houses to spread the awareness among the general public specially in the rural sector about the benefits and working style of the national pension scheme. In future the scheme is having huge potential to spread the benefits of the strong capital market of India in either auto option or active option. BIBLIOGRAPHY [1.] Bhalla V K, Investment Management, S Chand & Co. [2.] Direct Taxes law & Practice Dr.H.C.Mehrotra&Dr. S.P. Goyal, SahityaBhawan Publications, Agra. [3.] Direct Taxes law & Practice Dr.Bhagwati Prasad WishwaPrakashan, N.Delhi. [4.] Simplified Approach to income Tax: Dr.Girishahuja&Dr. Ravi Gupta SahityaBhawan Publishes & Distributors, Agra. [5.] Chaturvedi Meenakshi & Khare Shruti. 2012. Study of Saving Pattern and Investment Preferences of Individual House hold in India. International Journal of Research in Commerce & Management. Volumeno. 3(2012), Issueno. 5 (May) ISSN 0976-2183 [6.] Kanti Das Sajay 2012, Middle Class Household s Investment Behavior: An Empirical Analysis. Radix International Journal of Banking, Finance and Accounting. Volume1,Issue9(September2012)ISSN: 2277-100X. [7.] N. Geetha & Ramesh M.2012. A Study on Relevance of Demographic Factors in Investment Decisions. Website International Journal of Financial ManagementIJFM Vol.1, Issue1 Aug 2012 39-56 IASET. www.valueresearchonline.com www.pfrda.org.in www.indiapost.gov.in www.epfindia.com Newspapers 1. Times of India 2. The Economic Times 3. Business Standard 268 P a g e