Low expense ratio, additional tax deduction and ease of rebalancing portfolio makes NPS an attractive investment vehicle for retirement savings.
In a bid to increase the penetration of NPS, Finance Minister Arun Jaitley has proposed to provide additional tax deduction of Rs. 50,000 to the subscribers of national pension system (NPS) under Section 80 CCD. A rough calculation indicates that investors falling under the highest tax slab, i.e. 30.90% can save up to Rs.15,450 per annum in tax.
Section 80 CCD provides tax benefits over and above the 80C limit which is currently Rs. 1.5 lakh annually (including an additional Rs.50,000). Investors get tax deduction of up to 10% of salary, subject to up to Rs.1.5 lakh on contribution towards pension funds. Currently, NPS comes under EET (exempt, exempt and tax) status.
“It is proposed to increase the limit of deduction u/s 80CCD of the Income-tax Act on account of contribution by the employee to National Pension Scheme (NPS) from Rs.1 lakh to Rs.1.50 lakh. It is also proposed to provide a deduction of upto Rs.50,000 over and above the limit of Rs.1.50 lakh in respect of contributions made to NPS,” said Jaitley in his budget speech.
NPS is a voluntary pension scheme launched by PFRDA which aims to provide pension to people in both the organized and unorganized sectors. Unlike employees’ provident fund or PPF, NPS gives investors greater control and flexibility and that too at very low cost.
Vishal Dhawan of Plan Ahead Wealth Advisors feels that additional tax benefit, low expense ratio and ease of rebalancing portfolio make NPS an attractive investment vehicle for retirement savings.
Suresh Sadagopan of Ladder7 Financial Advisories is of the view that NPS has an edge over other retirement products like Mutual Fund Linked Retirement Plans (MFLRPs), insurance annuities, PPF and EPFO. “The additional benefit of Rs.50,000 a year will give a fillip to the fund managers of NPS. For retirement savings, NPS is a cost efficient investment. The expense ratio is also very low at just 0.01% per annum. Also, unlike other pension products, NPS subscribers have an option to customize asset allocation which makes it a superior product.”
Manoj Nagpal of Outlook Asia Capital seconds the view and says that the performance of NPS and MFLRPs is at par with each other. “If we look at the comparison, both NPS and MFLRPs have delivered CAGR of 11% to 13% since 2008 when NPS was first introduced.”
Nagpal explains the tax implication of NPS, “Majority of advisors have a misconception that the entire 60% of NPS corpus is taxable. However, a few advisors are aware of section 10 (10) A of Income Tax Act which says that the proceeds under NPS is fully exempt from tax for government employees. For private sector employees, 1/3rd of pension received is taxable if gratuity is received; else 50% of entire corpus is tax free. This will reduce the total tax outgo to a greater extent. However, there is no such benefit available for the self-employed individuals currently.”
A few advisers have a different take on NPS. “I agree that the proposed regulation can make NPS attractive; however, retirement linked mutual funds have the potential to outperform other asset classes in the long term due to their better fund management strategy,” said Hemant Rustagi of Wiseinvest Advisors. He said that NPS subscribers have to mandatorily annuitize 40% of accrued corpus which is not the case with mutual funds. Only three fund houses have retirement linked pension plans – Franklin Templeton Pension Fund, UTI Retirement Benefit Pension Fund and Reliance Retirement Fund.
Though NPS is a low cost and tax efficient investment for retirement savings, it didn’t take off in a big way due to low commissions. PFRDA is reportedly mulling to increase incentive for distributors under NPS and likely to come out with a regulation next month.
Currently, NPS is distributed through points of purchase (POPs). POP is an entity that sells pension products to subscribers. These entities act as collection points and extend a number of customer services to NPS subscribers, including requests for withdrawal from NPS. Almost all banks (both private and public sector) and majority of stock broking firms are NPS POPs.
Last year, PFRDA had proposed to allow IFAs and corporates to distribute NPS. The proposal said that IFAs would be able to sell NPS by empaneling with any one POP under sub broking model called POP – sub entity (POP-SE). They have to pay a fee for registration to PFRDA and enter into an agreement with POP for POS-SE.
