NPS: Securing India’s greying population

NPS is an apt choice as a retirement planning instrument

China recently ceded its position as the world’s most populous country to India.

With this comes the worrisome projection that India’s elderly population (aged 60 and above) will touch 194 million in 2031 from 138 million in 2021, a 41 percent increase over a decade. This means that India will have to deal with the consequences of a rapidly shrinking workforce and a growing dependency ratio.

While this is a challenging backdrop, the good news is that the National Pension System (NPS) will be a crucial feature in India’s retirement planning landscape, and help alleviate that load.

Also read: A step-by-step guide to opening an NPS account online

NPS is one of the most powerful retirement schemes in India. It is a defined-contribution pension system regulated by the Pension Fund Regulatory and Development Authority (PFRDA), under the Union Ministry of Finance.

One key advantage of NPS is its continued tax exemption under the new tax regime, making it an attractive choice. With the flexibility to adjust the asset mix based on life stage and the advantage of low management fees ranging from 3 to 9 bps, the NPS presents a compelling opportunity to build a substantial retirement corpus. Furthermore, the provision to withdraw 60 percent of the final corpus tax-free serves as an additional incentive for investors.

Also read: NPS Tier-II investment account: Lucrative option, but lack of clarity on capital gains taxation a dampener

As India’s private sector gains prominence within the economy, demand for the cost-effective and tax-efficient NPS is expected to rise. This trend becomes even more crucial as we approach 2050, a time when the country is projected to have around 340 million citizens in retirement age.

Many people think that NPS equity schemes only invest in large-cap stocks, but this is not true. They are actively managed and can invest in the top 200 companies by market cap, including quality mid-cap ones. This helps them earn better long-term returns for subscribers. In fact, NPS equity schemes have outperformed large-cap mutual funds in the last 10 years (as of January 31, 2023, per a CRISIL MI&A report).

One concern holding back investors from considering NPS is the mandatory 40 percent allocation requirement to annuities in NPS. However, annuities provide a consistent and guaranteed income stream during retirement, while the remaining 60 percent of the corpus, which is tax free, can be allocated as per asset preferences.

NPS offers extremely low charges and significant benefits compared to alternative instruments. By choosing NPS, individuals can receive a larger tax-free lumpsum and still benefit from annuity income, addressing concerns about taxation and mandatory annuities.

Despite concerns about mandatory annuitisation and annuity taxation, individuals who overlook NPS miss significant advantages. Comparing the NPS to an alternative instrument with a 2 percent annual charge, assuming both offer an 8 percent annual growth rate (conservative estimate) after 30 years, NPS accumulates around 1.6 to 1.7 times more than the alternative.

With a tax-free withdrawal of approximately Rs 96-98 (60 percent of the corpus), NPS outperforms the alternative’s lumpsum of Rs 90. Additionally, NPS offers lifetime annuity, making annuity payments effectively free while still enjoying a higher lumpsum.

The NPS is a formidable solution to India’s retirement planning challenges. It will emerge as a reliable tool to secure financial stability during one’s golden years.