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5 reasons for making NPS your main retirement vehicle

Tax efficiency and low costs are key advantages of the NPS

July 05, 2021 / 10:32 AM IST

India’s senior citizen demographic has been a matter of justifiable pride. This is the wealth-building generation that contributed to the GDP before globalization. They “made it” without bank loans freely being available back then. You marvel at their financial best practices – saving, paying taxes and investing in State financial products. For them, the National Pension Scheme (NPS) is a social security of sorts.

NPS’ popularity is being credited to its many advantages of exceptional tax benefits and pocket-friendly investments. A scheme earlier restricted to central government employees is now open to all Indians, including NRIs. Being regulated by the PFRDA (Pension fund regulator under the Finance Ministry), there is transparency in governance. I’d say this voluntary scheme offers cheer to the prospect of retired life in India.

There are five major attractive advantages of NPS, which protect the interest of its subscribers.

Reasonable Tax Efficiency: As an NPS subscriber, you can claim exemption of up to Rs 50,000, u/s 80CCD (1B). Secondly, there’s additional tax-saving as my employer contributes* to my NPS account u/s 80CCD (2). The best part is both these benefits are beyond the Rs 1,50,000 limit of section 80C. This makes NPS a more desired tax planning investment.

For the self-employed, 80CCD (1B) and 80C apply. Up to 20 percent of gross annual income can also be invested and claimed for tax exemption under section 80CCD (1). This has a cap of Rs 1,50,000. As an NPS subscriber, you can also transfer superannuation funds to my NPS account without facing any tax implications, with all approvals in place.

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Low Cost: You think the economical entry for NPS makes it a go-to retirement plan. Depending on the chosen account (Tier-1 or Tier II), the minimum deposit is only Rs 1000 per annum. You came across the declaration that NPS is one of the “world’s cheapest plans”. You wouldn’t disagree, given the enrolment, transaction and maintenance charges. The returns are actually much more. On average, NPS schemes tend to deliver returns to the tune of 15.86 percent for a 5-year term**.

Allowance and Appropriation of Equity Exposure: Between the Active and Auto Choices, the Active Choice permits investment distribution among equity, corporate bonds, government Securities and alternative assets. In Equity, you can push up to 75 percent of your investment amount, opting for a “high risk-high return” approach. As you turn 50, the equity portion reduces at 2.5 percent points p.a. From age 60 onwards, the limit is set at 50 percent. Stability in the risk-return balance protects you as you get closer to retirement.

Asset-class agility: The Active Choice offers flexibility between asset classes and the proportion of funds to allocate to each. Going agile with age is a good prospect! However, the allocation cannot exceed 75 percent for Equity and 5 percent for alternative investment funds. Each asset class has its risk profile, which qualified fund managers provide adequate information and guidance for. The Auto Choice allows you to “automatically” reduce risk exposure as you age. A pre-defined portfolio helps you determine fund proportion per asset class. This portfolio also changes as per your age. With age increase, the exposure to Equity and Corporate Debt tends to decrease.

More Matters: Easy access via public and private financial service providers makes NPS convenient for everyone. The smooth, swift, and paperless online procedure creates practicality during current COVID-related situations. An online NPS account creation is a matter of 30 minutes, perhaps the same as ordering your favourite pizza.

The portability of accounts also allows convenient re-location. Partial withdrawals are possible on completion of 3rd year in NPS. A maximum of 25 percent can be withdrawn tax-free three times in the tenure to allow for major expenses. These, you think, create win-win retirement scenarios.

Considering the ease of initiation, smooth working, flexibility and earning potential of NPS, the number of subscribers as of May 2021 is nearly 14.6 million across all sectors. Of these, 11,58,027 are in the corporate sector alone. These numbers reassure any potential NPS subscriber. So, for those of you in your 30s or 40s, with a fairly un-pixelated vision of your future at 60, make NPS your trending hashtag.
Rajeev Srivastava is Head of Products and Business Development, HDFC Securities
Tags: #invest #NPS)
first published: Jul 5, 2021 10:32 am

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