Citizen Investment Trust (CIT)

Objectives of Citizen Investment Trust(CIT)

1.       Financial Security Post-Retirement

In Nepal retirement age is 58 years, so CIT provides the financial security for post-retirement. Employee can contribute monthly and can save for future.

2.       Promote Savings Culture

At the end of month we often say I am out of money. That similar will happen at the end of year and years so CIT is like saving culture and CIT will automatically deduct at month end. So no hassle to go to CIT office.

3.       Capital Market Development

The saving made by employees directly goes for economic development. Productive instruments available in Nepal’s capital market, including government securities, corporate shares, debentures, and banking instruments.

4.       Employee Welfare Enhancement

It will enhance employee welfare by providing loan facilities, tax benefits and provides interest on monthly CIT. This is both win-win situation for employees and CIT.

5.       Tax-Efficient Savings

According to section 63 of the Income Tax Act, 2058, employee will get tax advantage from CIT. When employee salary increases employee can contribute more to get tax benefits.

Eligibility Criteria: Who Can Participate?

The Employee Savings Growth Retirement Fund, 2059 has been designed with inclusive participation criteria to benefit the widest possible spectrum of employees working in Nepal’s organized sector.

Eligible Employee Categories

1. Government Employees:

All personnel employed in ministries, departments, and offices of the Government of Nepal

2. Constitutional Body Employees:

Staff working in constitutional bodies established under Nepal’s constitution

3. Semi-Government Institution Employees:

Workers in semi-governmental organizations and public enterprises

4. Organized Sector Employees:

Personnel employed in registered organized institutions, companies, and corporations established under prevailing Nepali law

5. Temporary and Seasonal Workers:

Contract employees, seasonal workers, and those in temporary employment arrangements

6. Consultants and Specialists:

Independent consultants, advisors, and technical experts engaged by eligible institutions

Contribution Rates and Flexibility

Employees enjoy considerable flexibility in determining their contribution level:

Important Note on Contribution Flexibility:

While employees can choose any contribution rate above 5%, income tax benefits are subject to limits prescribed under the Income Tax Act, 2058. Consult with tax advisors to optimize tax advantages.

Contribution Calculation Example

Example Calculation:
Employee Name: Ram Kumar Sharma
Position: Section Officer, Ministry of Finance
Monthly Gross Remuneration: NPR 75,000
Chosen Contribution Rate: 10%

Calculation:
Monthly Contribution = NPR 75,000 × 10% = NPR 7,500
Annual Contribution = NPR 7,500 × 12 = NPR 90,000
Contribution over 25 years = NPR 22,50,000 (principal only, excluding returns)

If the fund generates average 8% annual return:
Projected corpus after 25 years ≈ NPR 58,00,000 (approximate)

At retirement, Ram Kumar receives the entire accumulated amount plus all investment returns as a lump sum payment.

Comprehensive Benefits Package

Unlike traditional savings accounts with fixed interest rates, the fund operates on a return-distribution model based on actual investment performance:

1.Return Calculation Basis:

 Returns are calculated based on actual income generated from fund investments in government securities, corporate shares/debentures, bank deposits, and other approved instruments.

2. Annual Distribution:

 Investment returns are credited to individual participant accounts annually, within 3 months of fiscal year end (by Ashwin/Kartik each year).

3. Proportional Allocation:

Returns are distributed proportionally based on each participant’s account balance. Higher balance = higher absolute return amount.

4. Compounding Effect:

 Returns credited to accounts remain invested, creating compounding effect over long term and exponentially increasing retirement corpus.

5. Transparency:

Every participant receives annual account statement showing: Opening balance, contributions during year, returns credited, closing balance.

Loan Facility During Service

Loan Facility is one of the best facility avaialable under this scheme. You are not just saving but you can take loan from the saving amount. Whenever you are in emergency, or want to create wealth you can take loan.

Loan Eligibility

🔍 Loan Amount Determination Example:
Participant: Sita Devi Sharma
Account Balance: NPR 5,00,000
Participation Duration: 5 years (eligible)

Maximum Loan Available = NPR 5,00,000 × 80% = NPR 4,00,000

If current fund return rate is 7%:
Loan Interest Rate = 7% + 1.5% = 8.5% per annum

For NPR 3,00,000 loan over 3 years:
Monthly Repayment (using reducing balance) ≈ NPR 9,450

Loan Conditions and Restrictions

1. New participants must wait 2 full years before becoming eligible for any loan
2. After taking a loan, participant must wait 2 years before applying for another loan
3. Loan amount cannot exceed 80% regardless of account balance
4. Interest rate is variable and determined by Board based on fund performance
5. Employing office must provide written recommendation supporting loan application
6. Loan principal and interest are deducted from final settlement if not repaid before retirement
7. Defaulting on loan may affect future loan eligibility at Board’s discretion

Retirement Benefits and Payment

Payment Triggering Events

Participants become eligible for lump sum payment upon occurrence of any of these events:

1. Normal Retirement: Upon formal retirement from service as per employment rules and completion of service period
2. Age-Based Withdrawal: Upon attaining 58 years of age, regardless of retirement status (allows early access for older employees)

• Permanent Disability: If participant becomes permanently disabled and unable to continue employment

1. Death Benefit: In event of participant’s death before withdrawal, amount paid to: (1) Person designated by participant OR (2) Legal heirs as per prevailing inheritance law if no designation

Payment Composition

When payment is made, participants receive the complete accumulated value:

1. Total Contributions: Sum of all monthly contributions made throughout participation period
2. Investment Returns: All returns credited to account from beginning to withdrawal date
3. Compounded Growth: Benefit of compounding on reinvested returns
4. Final Settlement: After deducting any outstanding loans and applicable advance taxes
5. Payment Mode: Single lump sum payment (no installment options)
6. Tax Deduction: Advance tax deducted as per Income Tax Act with TDS certificate provided

Tax Benefits and Advantages

Under the Income Tax Act, 2058, contributions to approved retirement funds qualify for tax deductions, reducing taxable income:

Tax Deduction Limits (As per Income Tax Act):
Individual Taxpayers: Contributions to approved retirement funds (including CIT) are deductible from taxable income subject to limits prescribed in Income Tax Act.

Current General Limit: Generally up to 30-33% of taxable income or actual contribution, whichever is lower (verify current rates with tax authorities).

Combined Limit: Total deductions for all retirement savings(SSF),  and provident funds combined cannot exceed prescribed upper ceiling.

Tax Saving Example

Tax Benefit Calculation Example:
Employee: Hari Bahadur Thapa
Annual Taxable Income (before deductions): NPR 12,00,000
Annual CIT Contribution (10% of NPR 8,000/month salary): NPR 96,000

Tax Calculation WITHOUT CIT Participation:
Taxable Income: NPR 12,00,000
Tax Payable (assuming progressive rates): NPR 1,80,000 (approximate)

Tax Calculation WITH CIT Participation:
Taxable Income: NPR 12,00,000 – NPR 96,000 = NPR 11,04,000
Tax Payable: NPR 1,62,000 (approximate)

TAX SAVED = NPR 18,000 per year

Over 25 years, total tax savings = NPR 4,50,000
This amount itself can be reinvested, generating additional returns!

Tax Treatment of Returns

The tax treatment of investment returns and final withdrawal is governed by specific provisions:

1. Annual Returns: Investment returns credited to participant accounts during accumulation phase are generally tax-deferred (not taxed annually)
2. Withdrawal Taxation: Final lump sum payment upon retirement is subject to income tax under prevailing law
3. Advance Tax Deduction: CIT deducts advance tax (TDS) from final payment as per Income Tax Act rates
4. TDS Certificate: Participant receives TDS certificate showing tax deducted, usable for final tax return
5. Tax Filing: Participants must report withdrawal in annual tax return and reconcile with advance tax deducted

CIT Participation Example

To illustrate the complete participant journey from enrollment through retirement, let’s examine a detailed, realistic example covering all aspects of the fund.

Participant Profile

1. Name: Maya Kumari Shrestha
2. Position: Assistant Director, Public Service Commission
3. Age at Joining: 30 years
4. Initial Monthly Salary: NPR 60,000
5. Chosen Contribution Rate: 10%
6. Expected Annual Salary Increment: 6%
7. Expected Service Duration: 28 years (till age 58)
8. Expected Average Fund Return: 8% per annum

Year-by-Year Projection (Selected Years)

Note: All amounts in NPR. Account balance includes contributions plus 8% annual returns compounded.

Loan Utilization During Service

Year 10 – Home Purchase Loan:
Maya’s Account Balance in Year 10: NPR 11,95,000
Maximum Loan Available (80%): NPR 9,56,000
Loan Taken for Home Down Payment: NPR 7,00,000
Interest Rate (8% + 1.5%): 9.5% per annum
Loan Tenure: 5 years
Monthly EMI: NPR 14,700 (approximately)
Loan fully repaid by Year 15

This loan helped Maya purchase her home while continuing retirement savings!

Retirement Benefits at Age 58

After 28 years of consistent participation, Maya reaches age 58 and becomes eligible for withdrawal:

1. Total Contributions Over 28 Years: NPR 52,45,000 (approximately)
2. Total Investment Returns: NPR 26, 05,000 (approximately)
3. Gross Retirement Corpus: NPR 78,50,000
4. Less: Outstanding Loans: NIL (all loans repaid)
5. Less: Advance Tax @ 15%: NPR 11,77,500
6. Net Payment to Maya: NPR 66,72,500

Total Financial Impact for Maya:
Out-of-Pocket Contributions: NPR 52,45,000
Net Received After Tax: NPR 66,72,500
Absolute Gain: NPR 14,27,500

Additionally:
• Tax savings during contribution years: ~NPR 7,50,000
• Home loan facilitated wealth creation: Property value appreciation
• Financial discipline developed: Systematic savings habit
• Peace of mind: Guaranteed retirement corpus

Total value delivered exceeds NPR 72 lakhs!