…if your company does not have one.
Very slowly but steadily, The National Pension System or NPS (governed by the PFRDA), has been making progress in terms of honing investment regulations, allowing new fund managers and above all showcasing performance superior to the traditional EPF and PPF investments by a good leap.
The recent press release by PFRDA for NPS (private) for non-government employees showed sound double-digit returns by NPS funds (weighted average returns of schemes of 6 fund managers). See table below for returns. This is far higher than the less than 9% returns that EPF or PPF delivered.
What is more interesting is that the NPS funds fared quite well when compared with mutual fund category averages. The table shows the average returns of mutual funds in similar categories for the year ending March 2013.
So what is it that may be keeping millions of potential investors still away from this product? We reckon many of you could have had the following reasons or misconceptions about NPS:
1. A regular NPS scheme for individuals does not provide tax benefit more than the Rs 1 lakh limit available for investments. You may have already exhausted that limit and find no use for NPS as a tax product
2. NPS invests in equity as well. That means it could be risky. You may not want to lose the capital put away for your sunset years.
3. NPS allows only phased withdrawal (not any longer) and you cannot take the money, after retirement, when you need it.
4. NPS, like other pension products, is EET (exempt, exempt, taxed). That means it will be taxed later, when you finally receive the money.
5. Since private fund managers manage the money, they may fleece you in terms of cost.
If those were some of your concerns, let’s try addressing them in the same order.
1. Go for the corporate model for more tax benefit
You are probably aware of the NPS – individual model. Did you know that the NPS Corporate model can actually fetch you higher tax deductions above the Rs 1 lakh threshold? Yes! This will be the primary reason for anybody looking for a pension option with superior tax deduction to go for a Corporate NPS model.
Under Corporate NPS, your employer’s contribution to your NPS account, subject to a maximum of 10% of your basic plus DA, will not be included in your taxable income. Let us suppose your annual basic plus DA is Rs 2,50,000.
If your employer contribution to NPS is Rs 25,000, then this amount shall not be included in your taxable income (under Section 80CCD(2) . If you are in the 30% tax bracket, it means Rs 7,500 of taxes saved. With higher basic pay, this will be much more.
Your employer too benefits by deducting this as business income for tax purposes.
Ok, that does not mean your employer is burdened more. You will simply take home less; simply because you are channelising the money for some savings at the point of source itself.
All it takes is some tweaking of your overall pay structure to ensure some amount is channeled as contribution to NPS.
Also, this can run parallel to the other benefits you have such as EPF, gratuity or superannuation.
The only twist here is that the contribution that will enjoy deduction over and above Rs 1 lakh should come from your employer. Your own contribution (the contributions of employer and employee need not be equal) will fall only under the Rs 1 lakh limit of Section 80C.
Go ahead and check with your employer about rejigging your pay structure by removing some taxable component (like some special allowance) and bringing in NPS. Of course, your company will need more employees to opt for this, if they have to implement it.
2. Equity exposure is not compulsory
NPS both for individuals and corporate sector, has an option to invest in equities; it is not mandatory. There are 3 schemes, Scheme E or equity fund option (maximum of 50% of one’s investment), Scheme G or gilt fund option or Scheme C or corporate bond fund option. You can invest 100% in Option G or C. That means you are not required to invest in equities. Even if you choose the auto option, only a maximum of 50% will go in to equities.
And what are the chances of your losing money with 50% equities? Nil, suggests our back-tested data. We placed weights of 50% in the Nifty and 50% in the Crisil Composite Bond index and ran a rolling five-year return since 2000. This rolling done on daily basis suggested nil negative returns and a less than 2% chance of returns not beating an average inflation of 6%.
Over longer periods of your holding, typically 20-30 years, your chances of losing would be nil, given that even a five-year return does not throw negative numbers.
Also, equity exposure is restricted to stocks that have derivatives. That leaves a universe of about 150 stocks, mostly blue chips and large caps.
Your fears may therefore be unfounded. And to top it, there is a good likelihood that the returns are superior to traditional products.
3. Lump sum withdrawal on retirement allowed
Through a recent change, NPS will now allow you to withdraw the 60% corpus (40% to be annuitized) as a lump sum anytime between your age of 60 and 70. Earlier, you had to do only a phased withdrawal every year. The change provides you the leeway to shift the money to other investment avenues or withdraw it when you are in real need.
4. DTC has proposed EEE for NPS
Yes, NPS, in its current form is EET. But so are other pension products in the insurance market today. But the silver lining is that the Direct Tax Code has proposed an EEE (exempt when you receive the money) structure for NPS. And since your retirement is a good way away, it is likely that the proposal will become effective. If not, remember, post retirement you may fall at a very low tax bracket or nil tax bracket. Hence, you may at best suffer low/nil tax on this income, based on the slab you fall under.
5. Low cost and efficient
If your experience with high cost products such as the earlier avtar of ULIP has left you disenchanted, know that NPS is perhaps among the lowest cost product you will come across.
With fund management fee (for corporate and individual NPS) capped at 0.25% and few other charges, your expense will be much lower than insurance products and perhaps a good number of mutual funds too. According to one of the NPS fund managers, the all-inclusive expense may be at the most 0.35-0.4%. Now, that is far lower than even the superannuation plans (at about 1-1.25%) that companies provide.
Remember, NPS may not beat your actively managed portfolios or mutual funds or your PMS managers as the asset allocation and the investment universe is restricted in NPS to reduce your risk. But NPS makes for a highly tax efficient, low cost, market- return product and is likely to beat inflation. It therefore provides an ideal diversification to your retirement portfolio.
Go ahead and ask your employer if you have already exhausted your Rs 1 lakh limit and are serious about a retirement nest. While large companies such as Wipro have gone for it, a good number have shunned it for the administrative work involved in building this in.
You may read more about Corporate NPS here: Corporate NPS
You may read about individual NPS here: NPS
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Thanks Vidya,
My question is:
Can I convert an individual NPS into corporate NPS?
Rgds
Hari
Hi Hari, good question. Currently it is explicitly state that a Corporate NPS can be sifted to individual NPS. Nothing is stated about the reverse. I shall However, enquire on this and get back. Tks, Vidya
Can you let me know the procedure for converting Corporate NPS to Individual NPS? If I do ever leave my company, I would like to keep contributing to it.
Also, is it possible to make voluntary contributions to the Corporate NPS account over and above the max 10% allowed? I am not looking for any tax breaks on the voluntary contributions.
Yes, you may check PFRDA website for details. But yes, youc an continue to contribute in that account even if the company does not contribute. thanks, Vidya
can a govt, employee open a other nps account on the basis of swalamban scheme.
Hi Ajit, A govt. employee will not qualify for Swalamban Scheme. Besides, one cannot hold multiple NPS accounts. Thanks, Vidya
Dear Vidya Mam,
I, being self employed, will stay away from NPS. However, as you rightly pointed out my answer may be very different if I am an employee and my employer offers me a matching contribution.
Some pointers about NPS:
1. NPS comes with a huge lock in which suave customers may not ideally need.
2. Low fund costs help only if you are sure of the competence and integrity of the fund manager and his bosses. Processes of the fund house is robust and clean.
3. Why not do SIP in an equity index fund with the lowest cost if fund cost really bother you.
4. I have learnt that now equity fund in NPS will be actively managed so naturally costs will be on the higher side.
5. Most importantly,I do not like the high debt component and the fact that I have to buy an annuity with the accumulated money.
Warm Regards,
Aditya.
Hi Aditya,
Sorry for the delayed response. First, thank you for taking time to pen your views here. Would like to respond to some of the points you raised.
1. NPS lock in is no different from the mind of lock-in you would have in any other pension product. Its is afterall, a retirement plan and a long-term product.
2. The competency of any fund manager is debatable whether in mutual fund, insurance or NPS. As for integrity, PFRDA regulates these funds and there are many guidelines on the kind of exposure that pension funds can take to group companies or in specific sectors. The processes for fund management decisisons are almost the same as mutual funds simply because the concept is similar.
3. Barring ETFs, all index funds come at around 1% expense ratio. NPS costs far lower than that. Two, NPS funds have a larger universe to invest from. They are allowed to invest in stocks that also have a derivative market (recent change in regulations). That means about 150 stocks are available for investment. Some NPS funds have already shifted from holding just index funds to a more active strategy, although mostly in blue ship stocks. Besides, NPS gives a good dose of debt in one single investment.
4. Cost of management – that is fund management fee is still capped at 0.25%. Hence they cannot go up.
5. The high debt component is actually not bad if you back test the 50:50 ratio. But yes, you may wish to hold a more aggressive portfolio allocation and NPS will not allow you to do that. Buying annuity should be viewed from a insurance product point of view. There are so many investors flocking to more expensive retirement plans offered by insurance companies. Seen in that light, NPS is a low-cost, efficient and reaosnbly returning product.
I agree that NPS may not be sufficient to fulfill one;s retirement needs. it can only be one of the investment options in addition to higher yielding options such as mutual funds and direct equities.
Thanks
Vidya
I am also in the financial products market.
I would like to add what Vidya bala has said, I request her to correct me if I am wrong,
Mr. Karnik as self employed requires a pension plan more than an employed person, who has no guaranteed income.
1. in nps after joining it, there is an option to join in Tier II, which has no lock-in and no limit to what you can invest, also no tax benefits fro Tier II nps..
2.The total cost to an individual is Rs 100 to the POP, .25% of fund to fund Manager and around Rs 100 for CRA.
3. All fund managers regulated by PFRDA, now becoming a statutory body, Only 8 fund Managers are selected and if you can look at the list most of them Manage only their Pension Fund, no other distractions.
4. The costs to be charged are transparent and are regulated by PFRDA. Also established entities have assigned the different roles , Fund Management, Record Keeping, Distribution have been given to well known corporate bodies only.
5. There is an active choice option as n individual can have his own combination, in it one an opt for any percentage in Government , Corporate debt anda maximum of 50 % in Equity. Like ECG can be 50-0-50 or 0-0-100 or an other combo
Hi Vidya,
I was a central govt. employee and was allotted a PRAN card and NPS account. But now I have shifted to the private sector. I want to continue with the existing NPS account and contribute voluntarily.
Can you tell me whats the way out ? Whats the procedure for sector shifting and where should I submit the relevant forms ?
Hi Aninda,
My understanding from the NPS regulations is that while the government contribution to your account will stop, you can continue to use the account and save voluntarily for your retirement. If there is any hindrance to this, you will have to contact your regional PF office. Tks, vidya
Hi Vidya,
When you say “Lump sum withdrawal on retirement allowed”, do you mean complete lump sum withdrawal is allowed or 60% of accumulated corpus can be withdrawn in lump sum?
My understanding is that previously partial lump sum withdrawal was also not allowed and then the authorities have changed the rules to allow 60% lump sum withdrawal. Is this understanding correct?
Thanks in Advance,
Pavan
Hi Pavan,
I quote the article
“Through a recent change, NPS will now allow you to withdraw the 60% corpus (40% to be annuitized) as a lump sum anytime between your age of 60 and 70. Earlier, you had to do only a phased withdrawal every year. The change provides you the leeway to shift the money to other investment avenues or withdraw it when you are in real need.”
Yes your undertstanding is right. Earlier the 60% amt. had to be withdrawn in a phased manner. Now it can be a lumpsum to that extent. Tks, Vidya
Hi Vidya,
When you say “Lump sum withdrawal on retirement allowed”, do you mean complete lump sum withdrawal is allowed or 60% of accumulated corpus can be withdrawn in lump sum?
My understanding is that previously partial lump sum withdrawal was also not allowed and then the authorities have changed the rules to allow 60% lump sum withdrawal. Is this understanding correct?
Thanks in Advance,
Pavan
Hi Pavan,
I quote the article
“Through a recent change, NPS will now allow you to withdraw the 60% corpus (40% to be annuitized) as a lump sum anytime between your age of 60 and 70. Earlier, you had to do only a phased withdrawal every year. The change provides you the leeway to shift the money to other investment avenues or withdraw it when you are in real need.”
Yes your undertstanding is right. Earlier the 60% amt. had to be withdrawn in a phased manner. Now it can be a lumpsum to that extent. Tks, Vidya
Hi – can you please provide me the details regarding how to convert the individual NPS account to Corporate account
Hello Mukesh, Conversion of regular NPS to corporate NPS is not possible. Only your employer has to open this account afresh for you. Tks, Vidya
Dear Ms.Vidya,
Could you provide reply to Mr.Hari? My query is also same.
Tks
HEllo Francis, Currently there appears no provision to convery individual NPS to corporate NPS. The latetr has to be opened by the employer afresh. tks, Vidya
HI Vidya, I converted my personal NPS account to corporate today. I understand that all the contributions made earlier will not fall in the same bracket as the 10% basic. However, just wanted to note that it is possible. My fund manager is ICICI. They have a simple form to do that.
Hi Arvind, This is good news and thanks for sharing it. I hope our readers take note of this as well. I shall add this to the blog article. Thanks. Vidya
hi vidya , is it possible to convert nps lite savalamban scheme to nps normal or nps corporate scheme
Hello sir, Pl. see this recent circular that allows such conversion to regular scheme: http://pfrda.org.in/writereaddata/linkimages/Circular%20on%20Inter%20platfrom%20Shifting837264889.pdf
thank you 🙂
Hello Vidya,
Fantastic blog – had a query…
The company I work for had enrolled me in to the NPS program.
I have now quit this company (and since I will not be working anymore) would want to invest in to my NPS account individually. What is the procedure for doing this – do I issue a cheque quoting my PRAN number to the POP or what else is the process.
Also please do advice if there is any specific form I need to submit to convert my erstwhile Corporate NPS in to an individual NPS account.
hello Praveen, it is best that you contact your POP for details. To my knowledge, the account can be continued with just your contribution going directly and hence you should provide ECS mandate etc. If you are changing your POP there is a PoP change form UOS-S5 (you will find it when you search online). But beyond that it is better to check if there is a separate form for ‘conversion’ from corporate to individual NPS. Thanks
Thanks for nice information blog
Thanks for nice information blog
Infosys is finally starting this from April 2014.
Thanks Vidya,
My question is:
Can I convert an individual NPS into corporate NPS?
Rgds
Hari
Hi Hari, good question. Currently it is explicitly state that a Corporate NPS can be sifted to individual NPS. Nothing is stated about the reverse. I shall However, enquire on this and get back. Tks, Vidya
Can you let me know the procedure for converting Corporate NPS to Individual NPS? If I do ever leave my company, I would like to keep contributing to it.
Also, is it possible to make voluntary contributions to the Corporate NPS account over and above the max 10% allowed? I am not looking for any tax breaks on the voluntary contributions.
Yes, you may check PFRDA website for details. But yes, youc an continue to contribute in that account even if the company does not contribute. thanks, Vidya
Hello Vidya,
Fantastic blog – had a query…
The company I work for had enrolled me in to the NPS program.
I have now quit this company (and since I will not be working anymore) would want to invest in to my NPS account individually. What is the procedure for doing this – do I issue a cheque quoting my PRAN number to the POP or what else is the process.
Also please do advice if there is any specific form I need to submit to convert my erstwhile Corporate NPS in to an individual NPS account.
hello Praveen, it is best that you contact your POP for details. To my knowledge, the account can be continued with just your contribution going directly and hence you should provide ECS mandate etc. If you are changing your POP there is a PoP change form UOS-S5 (you will find it when you search online). But beyond that it is better to check if there is a separate form for ‘conversion’ from corporate to individual NPS. Thanks
Hi – can you please provide me the details regarding how to convert the individual NPS account to Corporate account
Hello Mukesh, Conversion of regular NPS to corporate NPS is not possible. Only your employer has to open this account afresh for you. Tks, Vidya
hi vidya , is it possible to convert nps lite savalamban scheme to nps normal or nps corporate scheme
Hello sir, Pl. see this recent circular that allows such conversion to regular scheme: http://pfrda.org.in/writereaddata/linkimages/Circular%20on%20Inter%20platfrom%20Shifting837264889.pdf
thank you 🙂
Dear Ms.Vidya,
Could you provide reply to Mr.Hari? My query is also same.
Tks
HEllo Francis, Currently there appears no provision to convery individual NPS to corporate NPS. The latetr has to be opened by the employer afresh. tks, Vidya
HI Vidya, I converted my personal NPS account to corporate today. I understand that all the contributions made earlier will not fall in the same bracket as the 10% basic. However, just wanted to note that it is possible. My fund manager is ICICI. They have a simple form to do that.
Hi Arvind, This is good news and thanks for sharing it. I hope our readers take note of this as well. I shall add this to the blog article. Thanks. Vidya
can a govt, employee open a other nps account on the basis of swalamban scheme.
Hi Ajit, A govt. employee will not qualify for Swalamban Scheme. Besides, one cannot hold multiple NPS accounts. Thanks, Vidya
Dear Vidya Mam,
I, being self employed, will stay away from NPS. However, as you rightly pointed out my answer may be very different if I am an employee and my employer offers me a matching contribution.
Some pointers about NPS:
1. NPS comes with a huge lock in which suave customers may not ideally need.
2. Low fund costs help only if you are sure of the competence and integrity of the fund manager and his bosses. Processes of the fund house is robust and clean.
3. Why not do SIP in an equity index fund with the lowest cost if fund cost really bother you.
4. I have learnt that now equity fund in NPS will be actively managed so naturally costs will be on the higher side.
5. Most importantly,I do not like the high debt component and the fact that I have to buy an annuity with the accumulated money.
Warm Regards,
Aditya.
Hi Aditya,
Sorry for the delayed response. First, thank you for taking time to pen your views here. Would like to respond to some of the points you raised.
1. NPS lock in is no different from the mind of lock-in you would have in any other pension product. Its is afterall, a retirement plan and a long-term product.
2. The competency of any fund manager is debatable whether in mutual fund, insurance or NPS. As for integrity, PFRDA regulates these funds and there are many guidelines on the kind of exposure that pension funds can take to group companies or in specific sectors. The processes for fund management decisisons are almost the same as mutual funds simply because the concept is similar.
3. Barring ETFs, all index funds come at around 1% expense ratio. NPS costs far lower than that. Two, NPS funds have a larger universe to invest from. They are allowed to invest in stocks that also have a derivative market (recent change in regulations). That means about 150 stocks are available for investment. Some NPS funds have already shifted from holding just index funds to a more active strategy, although mostly in blue ship stocks. Besides, NPS gives a good dose of debt in one single investment.
4. Cost of management – that is fund management fee is still capped at 0.25%. Hence they cannot go up.
5. The high debt component is actually not bad if you back test the 50:50 ratio. But yes, you may wish to hold a more aggressive portfolio allocation and NPS will not allow you to do that. Buying annuity should be viewed from a insurance product point of view. There are so many investors flocking to more expensive retirement plans offered by insurance companies. Seen in that light, NPS is a low-cost, efficient and reaosnbly returning product.
I agree that NPS may not be sufficient to fulfill one;s retirement needs. it can only be one of the investment options in addition to higher yielding options such as mutual funds and direct equities.
Thanks
Vidya
I am also in the financial products market.
I would like to add what Vidya bala has said, I request her to correct me if I am wrong,
Mr. Karnik as self employed requires a pension plan more than an employed person, who has no guaranteed income.
1. in nps after joining it, there is an option to join in Tier II, which has no lock-in and no limit to what you can invest, also no tax benefits fro Tier II nps..
2.The total cost to an individual is Rs 100 to the POP, .25% of fund to fund Manager and around Rs 100 for CRA.
3. All fund managers regulated by PFRDA, now becoming a statutory body, Only 8 fund Managers are selected and if you can look at the list most of them Manage only their Pension Fund, no other distractions.
4. The costs to be charged are transparent and are regulated by PFRDA. Also established entities have assigned the different roles , Fund Management, Record Keeping, Distribution have been given to well known corporate bodies only.
5. There is an active choice option as n individual can have his own combination, in it one an opt for any percentage in Government , Corporate debt anda maximum of 50 % in Equity. Like ECG can be 50-0-50 or 0-0-100 or an other combo
Hi Vidya,
I was a central govt. employee and was allotted a PRAN card and NPS account. But now I have shifted to the private sector. I want to continue with the existing NPS account and contribute voluntarily.
Can you tell me whats the way out ? Whats the procedure for sector shifting and where should I submit the relevant forms ?
Hi Aninda,
My understanding from the NPS regulations is that while the government contribution to your account will stop, you can continue to use the account and save voluntarily for your retirement. If there is any hindrance to this, you will have to contact your regional PF office. Tks, vidya
Infosys is finally starting this from April 2014.