…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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