Salient features of NPS
1. Low Cost - The investment management fee is as low as 0.0009% p.a., irrespective of the type of portfolio the account holder desires. Yes, there are some small fees charged for various purposes, but even then it is claimed that the asset management fee for NPS is a fraction of what Mutual Fund companies charge.
2. Diversified Investment - The corpus will be invested in three asset classes –– Equity (E), Government Securities (G) and Corporate Bonds and Fixed Deposits (C).
3. Dynamic Asset Allocation - The account holder can opt for an active choice i.e. change the asset mix at any time he desires or opt for a default option called Life Stage Fund, where the asset mix changes automatically depending upon the age of the subscriber. For example at the age of 18 years, the asset allocation would be 50% in E, 30% in C and 20% in G till the investor turns 35 when the ratio of investment in E and C will then decrease annually, while the proportion of G will rise. At 55 years, G will account for 80% while the share of E and C will fall to 10% each.
Because of the link of NPS with equities, you may stagger your investments in some installments like the SIP of a mutual fund. However, take into account that there is a transaction charge of 0.25% or Rs. 20 (whichever is higher) on every contribution.
4. Low annual contribution - Minimum annual contribution is Rs. 6,000 per FY payable in one or more installments of minimum Rs. 500.
5.Biased Transparency - Transparency could be improved. Whereas Mutual Funds have to announce their NAV's on a daily basis, NPS would announce NAV on a yearly basis.
Now that we have understood the basics of NPS let us continue to calculations and for the sake of simplicity, I am comparing NPS to only Employee Provident Fund EPF(for now).
In the beginning, Rs 5,000 is put into each every month. Taking into consideration rising income, this amount goes up eight per cent every year. The EPF investment earns 8.75 per cent a year and let us assume (no not the aggressive historic return of 20% of equity markets) the NPS achieves a very conservative return of 12.75 per cent.
तीस साल बाद..... , Rs 68 lakh(approx) have been invested in both.
While the EPF account has Rs 2. crore(approx) in it, the NPS account on the other hand will have Rs 4. crore(approx)in it.
With 40 per cent of this amount, (Rs. 1.60 crore) the saver will have to compulsorily buy an annuity which will yield a lifelong pension. That leaves Rs 2.4 crore(approx) for a lump sum withdrawal. The tax outgo on the returns will be indexed but even if we assume that it will be ten per cent, we are left with Rs 2.16 crore!
With 40 per cent of this amount, (Rs. 1.60 crore) the saver will have to compulsorily buy an annuity which will yield a lifelong pension. That leaves Rs 2.4 crore(approx) for a lump sum withdrawal. The tax outgo on the returns will be indexed but even if we assume that it will be ten per cent, we are left with Rs 2.16 crore!
You see, what the magic of conservative equity returns over a long period means!!
It means that even after paying for a lifelong pension-bearing annuity, and even after paying taxes, the saver will be left with a higher lump sum amount than EPF.
Clearly, this passion of savers for the false safety of fixed income returns, and the fear of the false dangers of equity are a prime cause of old-age financial stress among retirees in India.
So, don't fall for conventional saving options, and embrace the NPS for your retirement savings. Of course, that doesn't change the fact that it's truly unpardonable for the government to give EPF and PPF a free pass on taxes and yet tax NPS at maturity.
With that let us come to the landmark announcement by our Finance minister in this year's budget.
In order to give a (much needed) fillip to NPS, the FM has proposed a separate deduction of Rs. 50,000 over and above the current deduction of Rs. 1,50,000 available u/s 80CCE for contributions to NPS. Consequently, now it is possible for a taxpayer in the 30% tax bracket to save up to Rs. 15,450 in tax every year over and above what he could do so far.
There is No Doubt that Retirement Planning should be the Numero Uno Financial Goal in any investors mind especially with rising life expectancy! I hope this tax benefit for NPS provides the boost in this direction.
Image source Behaviour Gap, PFRDA
