Author Archives: Chetan Khattar


National Pension Scheme - Neational Pension system

National Pension System (NPS) or more commonly referred to as National Pension Scheme is a government approved pension system regulated by Pension Funds Regulatory Development Authority (PFRDA) for Indian citizens in the age group of 18-60. This falls under the broad category of tax advantaged investments (rather than tax free investments). While it is compulsory for central and state government employees have to subscribe to NPS, as of now it is optional for others. The N.P.S was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens although it started operations only in 2008-09. It aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens of India. Sometimes the national pension system is also referred to by some as the new pension scheme – although that is not the official name. In this article we will attempt to provide you with the national pension scheme details.
Earlier Government of India used to provide a definite pension to employees after retirement which was based on employee length of service and average of emoluments drawn during ten months immediately preceding the date of retirement. This was a strong move from defined benefit pension to a defined contribution based pension which broadly means that you have to invest now to earn pension and your pension will depend only on the amount invested by you. Under NPS, two types of accounts are available to subscribers :

NPS Tier 1 Account

Tier 1 NPS Account is mandatory for all central government employees. It is mandatory for them to contribute 10% of their basic salary plus DA plus DP every month towards this account, and same amount is contributed by the government.
There are severe restrictions on how money can be withdrawn from the Tier 1 account, as it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before age 60. You can keep the remaining 20% with you.
When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA; the remaining can be withdrawn in lump-sum or in a phased manner.

NPS Tier 2 Account

The NPS Tier 2 account is very similar to the Tier 1 account, and if you are not a government employee who wants to invest in NPS, you would want to invest the minimum of Rs. 6,000 in Tier 1 and then invest the rest of your money in the Tier 2 account.
This is because Tier 2 is quite similar to Tier 1 in all respects except for the harsh withdrawal conditions. You are free to withdraw your money from the Tier 2 account any time that you want without any penalties.
Minimum amount for opening Tier 2 account is Rs. 1,000 and minimum balance required at the end of the year is Rs. 2,000. You need to make at least 4 contributions in a year.

Common Features of NPS Tier 1 and Tier 2 Account

  • Multiple NPS accounts for a single individual are not allowed for very obvious reasons
  • You can appoint a nominee at the time of opening of a NPS account. Also you can appoint up to 3 nominees for your NPS Tier I and NPS Tier II account. In such a case you are required to specify the percentage of your saving that you wish to allocate to each nominee. The share percentage across all nominees should collectively aggregate to 100%. Also the nominee can be changed after receipt of PRAN card
  • Investment in NPS is independent of your contribution to any Provident Fund or any other Pension Fund for that matter
  • Permanent Retirement Account Number (PRAN card) is common for both
  • Non Resident Indians are also eligible to register for the NPS System

Distinctive Features of NPS Tier 2 NPS Account

Here are few significant features of NPS Tier 2 Account which differentiate it from the Tier 1 NPS account:

  • NPS Tier 2 Account can be looked at as a liquid version of the NPS Tier 1 Account since there is flexibility to withdraw with the subscriber
  • No penalty fee is charged from the subscriber in case he/she withdraws from the NPS account prematurely
  • Customers can choose between Equity Funds, Government Securities and Fixed Income Instruments other than Government Securities
  • Fund option can be chosen by you else it goes into the auto-mode which invests in funds based on your job profile and age
  • Since, NPS Tier 2 Account does not have a locking period for funds invested in the same, there is no tax rebate also that applies. Hence, money invested in NPS Tier 2 Account is not tax deductible under section 80C of the Income Tax Act
  • NPS Tier 2 Account is a good savings and investment option for customers who are looking for an instrument which is a medium-term investment tool
  • Only 50% of the fund can be invested in equity-fund
  • There is no limit on the number of times you can withdraw money from the NPS Tier 2 Account
  • Facility of one-way money transfer from Tier 2 to Tier 1 NPS Account

Swavalamban Scheme (swavalamban national pension system)

This scheme is for the financially less fortunate members of the society in the unorganized sector and is a way to incentivize investments for them.
The government pays Rs. 1,000 every year for four years, if you open a NPS account under the Swavalamban scheme, but there are limitations on who can open an account under the Swavalamban scheme.

Broadly following conditions needs to be satisfied:

  • Subscriber should not be covered under employer assisted retirement benefit scheme and also not covered by a social security schemes under any of the current laws.
  • Subscriber contribution in NPS is minimum Rs. 1000 and maximum Rs.12000 per annum, for both Tier I and Tier II taken together, provided subscriber makes minimum contribution of Rs.1000 per annum to his Tier 1 account

Conclusion on the NPS (National Pension System)

NPS Tier 1 and Tier 2 is a good initiative by the Government and certainly the way to go but still it is at early stages of its evolvement and you can expect changes over time in the the system specifically relating to Taxation and Withdrawal.

Also refers to: nps pension scheme

All efforts are made to keep the content of this article correct and up-to-date. But we do not make any claim regarding the information provided as correct and up-to-date. The contents cannot be treated or interpreted as a statement of law. In case, any loss or damage is caused to any person due to his/her treating or interpreting the contents of this article as correct, complete and up-to-date statement of law out of ignorance or otherwise, the writer will not be liable in any manner whatsoever for such loss or damage.




“Recurring Deposit is a special kind of Term Deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits” – This is the wiki definition of RD and probably the most crisp and clear one, now let’s get into the details .

Although banks have a separate rate of interest rate charts for your RD but it is almost identical or rather same as to what you get in a normal term deposit but since you need to only pay a fixed amount monthly and not the complete amount in one shot you actually get a better deal on the interest front. Generally FD’s with very small duration have lesser ROI (Rate of Interest) than FD’s with Short to Long term tenure. So working on the same principle if you target that you need a certain sum of money after a specific period of time and you are ready to invest a fixed sum of money in Fixed Deposits every month RD’s are your best answer. Since when you are near your withdrawal date bank will offer lesser ROI as compared to RD which you took say 9 months back.

Let us take an example to understand the calculation of interest on RD and the differential over a term deposit you can earn . Say Mr. X deposits Rs 1,00,000/- per month for a period of 12 months into an RD with ROI @ 7.5% (this is exactly the same ROI which you get by depositing money in a term deposit of 12 months) You can build your own RD calculator in Excel as follows:

RD Calculator

This is based on quarterly compounding of interest as offered by almost all banks in India. You can also crosscheck the working with RD calculator of any bank in India just keep in mind the ROI offered by the bank in the RD Calculator since that might be fixed and you will not be able to change it.



Now we calculate interest on term deposit assuming same amount is invested for balancing period at the ROI prevailing at that point in time. For simplicity we take the current ROI offered by a major scheduled bank in India and here are the numbers :


You can see that ROI reduces with the term of Fixed Deposit and comes to 5.50% for the final FD from 7.5% of the first FD. Overall you save around Rs. 1,770.81 in the above example or a 15 basis point better interest than a normal term deposit. Some of you might think that the differential is not significant and rightly so but you still save some money and get to learn both the workings and undererstand the difference in the calculations !

Other Benefits you get in RD over the normal Term Deposit :

1. For a much smaller investment per month, get interest rates equal to that of regular Fixed Deposits.
2. TDS is not applicable on the Interest earned by Recurring Deposits as per current income tax rules.

Also for some people RD is a good tool which helps them develop a habit of making savings from their monthly income and plan which they otherwise might skip. RD’s generally have a minimum tenure of 6 months (and in multiples of 3 months thereafter) up to a maximum tenure of 10 years.  You can also avail loans against the collateral of Recurring deposit up to 80% to 90% of the deposit value like you do in a term deposit . To sum up RD is a product which will suite you only if you wish to save fixed installments of money on a regular basis and you are looking only to invest in Fixed Deposits ( For Debt or Equity Oriented Funds you have SIP’s – Systematic Investment Plan) .


All efforts are made to keep the content of this article correct and up-to-date. But we do not make any claim regarding the information provided as correct and up-to-date. The contents cannot be treated or interpreted as a statement of law. In case, any loss or damage is caused to any person due to his/her treating or interpreting the contents of this article as correct, complete and up-to-date statement of law out of ignorance or otherwise, the writer will not be liable in any manner whatsoever for such loss or damage.


Exempt Income


Exempt Income

There are various deductions, rebates and other benefits available in the Income Tax Act. 1961 although the simplest to understand and take benefit of is Section 10 of the Income Tax Act 1961 which primarily deals with most of the Exempt Incomes. These Incomes are directly exempt and are not considered at all while computing the tax liability. However these incomes are required to be disclosed in the Income Tax Return filled by the assessee. Here is a list of the most common exempt incomes :

Long-term capital gains

Any long-term capital gains received on stocks and equity oriented mutual funds are exempt from tax provided the transaction is done on a recognized stock exchange and Securities Transaction Tax (STT) is paid on the same. In other words, any income you may generate on account of sale of these instruments are exempt from income tax obligation as per Section 10(36) of the Income Tax Act. But, for this, the equity instrument should be held for more than a year. Please note that this is not applicable to debt mutual funds. Since Long Term Gain is exempt you can not set off or carry forward Long Term capital Loss as well. As per Income Tax Act, equity oriented fund (EO fund) refers to units of Unit Trust of India or a fund wherein investible funds invested by way of equity shares in domestic companies exceed 65%of the total proceeds of such fund and which has been set up under a scheme of a mutual fund specified under Section 10(23D) of the Act. The percentage of equity shareholding of the fund is computed with reference to the annual average of the monthly averages of the opening and closing amounts.

Income from gratuity

Gratuity is paid by the employer as part for gratitude for acknowledging the employee's long-standing meritorious service. Gratuity received by any government employee is fully exempted from income tax. For non-government employees covered by the payment of Gratuity Act of 1972, the least of the three is exempted from income tax

  • 15 days salary based on the last drawn salary * No of Completed Years of Service
  • Rs. 10,00,000
  • Total gratuity received.

The gratuity received by an employee is not taxable if it is received on his retirement, his becoming incapacitated prior to such retirement, termination of employment or if such gratuity is received by his widow, children or dependants on his death.



Agriculture Income

India is primarily an agrarian economy where a large part of its GDP comes from Agriculture. The constitution of India does not allow the Central Govt. to tax Agricultural Income and the exclusive power to tax it, is with the state legislatures therefore the Indian Income Tax Act of 1961 exempts any income one generates through agriculture from tax liability. However, agriculture income is included, for the limited purpose of determining the tax rate, in computing the income tax liability if the net agricultural income exceeds Rs 5,000 for, say, FY15 and total income, excluding net agricultural income, exceeds applicable basic income exemption of Rs 2,50,000.

Is Dividend Income exempt from tax?

Although dividend distribution is taxable in the form of DDT (Dividend Distribution Tax), still the income is exempt in the hands of the receiver upto10 lacs per year u/s 10(34) of the Income Tax Act 1961. Also For equity oriented Schemes Dividend is exempt in the hand of the recipient and no DDT is payable by the Scheme since DDT was already paid by the company while distribution of dividend to its shareholders. Although on dividend from other than equity oriented Schemes such as Money Market & Liquid Schemes and Debt Schemes DDT is required to be paid @ 25% + Surcharge + Education Cess if distribution is done to an Individual or HUF ( Hindu Undivided Family) .

Interest on Public Provident Fund

The PPF is one of the most useful tax saving investment opportunity and is open to all. Besides the best part is that when you invest in it you get exemption u/s 80C, when you earn interest it is again exempt u/s 10(11), and the end when the money is withdrawn (lock in period of 5 years) it is again exempt thus keeping it EEE or Exempt Exempt Exempt at all the three stages.

Allowances received from Employer

There are various allowances received from your employer which are exempt u/s 10 of the Income Tax Act 1961 subject to certain monetary limitations and conditions. These include House Rent Allowance, LTA, Transport Allowance, High Altitude, Island Allowance, Allowance to High Court Judges, Allowance from United Nation Organization etc.

Allowance for foreign service

Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax- free perquisites and allowances received outside India.

Tax exemption regarding reverse mortgage scheme u/s 10(43)

The Reverse Mortgage scheme is for the benefit of the senior citizens, who own a residential house property. In order to supplement their current income, they can mortgage their house with a scheduled bank or a NBFC in return of a regular monthly/quarterly/annual income. The beauty of this scheme is that the senior citizen can continue to stay in the house property and also receive regular income from the same

throughout their lifetime.

The Bank or NBFC recovers the loan along with interest by selling the house property after the death of the borrower and returns the excess amount to the legal heirs of the borrower. Although before sale preference is given to the legal heirs to repay the loan and get the property released. Any transfer of a capital asset in such a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government is not regarded as a transfer and therefore does not attract capital gains tax. The loan amount received is also exempt from tax.

All efforts are made to keep the content of this article correct and up-to-date. But we do not make any claim regarding the information provided as correct and up-to-date. The contents cannot be treated or interpreted as a statement of law. In case, any loss or damage is caused to any person due to his/her treating or interpreting the contents of this article as correct, complete and up-to-date statement of law out of ignorance or otherwise, the writer will not be liable in any manner whatsoever for such loss or damage.