Should You Look at NPS For Retirement Portfolio?
Written on Thursday, August 17, 2017
By Sanjiv Puri
NPS or National Pension System stands out amongst several other investment alternatives because of its low-cost, easy accessibility and an option to build a corpus through market-linked asset classes. NPS is a retirement focused scheme regulated by a statutory body called Pension Fund Regulatory and Development Authority (PFRDA). Since NPS is market linked, thus the returns are not guaranteed, rather it depends on the performance of the underlying assets.
1. Anyone between the age of 18-60 can join NPS, with a minimum annual investment of Rs 1,000. One has to be KYC compliant to invest in NPS.
2. While opening NPS account, the subscriber must choose one scheme from any of the 8 Fund Managers.
3. Then the investor needs to choose one out of the two investment options: 'Auto' or 'Active.' On choosing 'Active' the subscriber has to self-do the %allocatation among three assets classes: E.C.G
a. E stands for Equity (Maximum Capping 50%)
b. C stands for Credit risk bearing fixed income instruments
c. G stands for Government Securities
d. % allocation needs to be done depending on whether the subscriber is conservative, moderate or aggressive.
4. If one is not comfortable in deciding, there is the 'Auto' choice. On choosing 'Auto' the proportion of E, C and G is determined as per the subscriber's age. the funds invested automatically begin with a maximum equity exposure of 50 per cent till the age of 35 years and then, tapers-off to 10 per cent by age 55. The fund management cost in NPS is 0.01 per cent. The lesser the cost, lesser it eats into the corpus during the accumulation phase.
5. Once registered, the subscriber gets a Permanent Retirement Account Number (PRAN), which captures all the data including personal details and transactions.
6. Contributions need to be made till the age of 60, after that the investor can withdraw up to 60 percent of the NPS corpus while annuity starts on the balance 40 percent of the corpus
NPS suits those who are looking for retirement solutions but are not very comfortable in making investment decisions on their own. Investing towards retirement requires taking care of various aspects such as proper asset allocation selection of the right products, etc. Not everybody could be able to cull out the right investment options on a regular basis over a working life of 25-30 years. In short, those who don’t have the time to actively manage their retirement portfolio or don't know where to invest and how much to invest gets an easy solution through NPS. It does proper allocation among debt and equity asset classes.
Tax benefits of NPS
At the investment stage, NPS offers the tax benefits under different sections of the Income Tax Act - Section 80CCD (1), Section 80CCD (1b) and Section 80CCD (2).
a. Under Section 80CCD (1): Investment up to Rs 1.5 lakh into NPS in a financial year is eligible for deduction under Section 80CCD(1). This deduction comes under the overall ceiling of Rs 1.5 lakh for deduction under Section 80C.
b. Under Section 80CCD (1b): In the budget 2016, the government had introduced additional tax benefit for investment up to Rs 50,000 in NPS. If the taxpayer contributes more than Rs 1.5 lakh in NPS, then investment up to Rs. 50, 0000, over and above Rs. 1.5 lakh, can be claimed as a deduction under the new section 80CCD(1b).
c. Under Section 80CCD(2): Over and above the ceiling limit of Rs 1.5 lakh provided under Section 80C and limit of Rs 50,000 under Section 80CCD(1B), NPS contribution from the employer up to 10% of Basic Salary + Dearness Allowance is also eligible for deduction under Section 80CCD(2). There is no upper cap (in terms of amount) on this tax deduction and it is available only to employees.
Taxation of NPS Returns
The NPS currently has partially exempt-exempt-tax i.e. EET structure. On maturity, 60 percent is available to withdraw but is fully taxable and even the annuity is taxable under the present tax laws. At age 60, maximum 60 percent of the corpus can be withdrawn while annuity is paid on balance 40 percent of accumulations. Although maturity corpus was made partially tax-free by giving tax-exempt status to 40 percent of the corpus amount, the balance 20 percent of the corpus that can be withdrawn still remains taxable. One may, however, defer the lump sum withdrawal till age 70 or to avoid paying taxes on this balance, one may club it with 40 percent annuitisation amount to buy the annuity.
What to Do?
To save for retirement, one should start investing early so that he/she can aggressively make use of equity related products. However, in NPS, the maximum one can invest in equities is capped at 50 percent of the contribution. Therefore, investors can create a retirement corpus with a mix of equity mutual funds and NPS. While making equity mutual funds investments, diversify across 3-5 consistently performing large-cap and mid-cap MF and also put in a portion earmarked for retirement into NPS.
Recent Changes in NPS
The government is doing all that it can to popularize the National Pension System (NPS). Here are a few such steps taken by the government to make NPS more customer-friendly.
1. ‘NPS by NSDL e-Gov,’ a free mobile app for NPS subscribers to view their NPS account, scheme wise holdings along with latest net asset value (NAV) and lots more
2. Change of address using Aadhaar authentication
3. Instant online IPIN generation for eNPS subscribers facilitating instant access to the NPS account. Waiting for physical I-PIN not required.
4. Facility to contribute Online using the IPIN credentials in the system.
5. Any subscriber having Tier I account in NPS can now activate Tier II account online through eNPS by entering the PRAN, date of birth and PAN.
6.Transfer funds from Tier II to Tier I. The POP can process a subscriber request to transfer funds from Tier II to Tier I account.
7. Withdrawal facility in Tier II account with no lock-in period. The subscriber can withdraw using their login credentials and OTP authentication on registered mobile number.
Being a very long-term investment product, make sure you understand the implication and the working of NPS before you open an account. Estimate the amount of monthly savings required to meet your post retirement expenses keeping inflation and life expectancy in the picture. Diversify across various investments including mutual funds and NPS but do not bank entirely on the latter. Annuities can provide a base-line support to meet household during retired years, but choosing NPS to accumulate a retirement corpus remains a choice which one needs to take now. A corpus created through a mix of mutual funds can still buy you an Immediate Annuity scheme when you are 60, with all your savings at your disposal. Listen to the call of your distant retirement and start saving for it now, delaying and procrastination won't be a wise decision