NPS – a less explored investment option!

National Pension Scheme

India does not have a formal social security investment options like its western counterparts. NPS or New Pension Scheme is an investment scheme, introduced by the Government of India in 2004, initially only for Central Government employees and later on (in 2009) for all Indian citizens. NPS is a voluntary long term investment plan for retirement. There are two types of NPS accounts – Tier 1 and Tier 2, but for the article, we will only focus on Tier 1 NPS account.

Why should one invest in NPS?

• Low Cost: The lowest cost investment option! Fund management charges are capped at 0.09% p.a. of total accumulated capital.

• Regulated: Pension Fund Regulatory and Development Authority (PFRDA) is the governing body.

• Discipline: A minimum investment of INR 1,000 is to be made to NPS each financial year. Regular investments into financial products like NPS brings in financial discipline.  

• Compounding Return: Due to the long-term nature of the investments and less withdrawal options available, the subscriber can enjoy compounding benefits.

• Flexibility: The subscriber can choose the contribution amount, the fund manager as well as switch the fund manager from time to time.

• Transparency: The NPS account can be accessed online anytime and the subscriber can track the investments on real time basis.

• Portability: No geographic restrictions. Account opened can be opened in any state and can be accessed from anywhere in the world. A unique Permanent Retirement Account Number (PRAN) is allotted to every NPS subscriber.

• Tax Benefit: This is the most unique feature of NPS.

  • NPS contribution are eligible for tax deduction u/s 80CCD(1) [Employee Contribution] / 80CCD(2) [Employer Contribution] upto a max ceiling of Rs. 150,000 as under:

    • For salaried employees: 10% of Basic + Dearness allowance

    • For self-employed: upto 20% of Gross Income

  • Additional Tax deduction of Rs. 50,000 – u/s 80CCD(1B) is available to all

  • Hence, an effective maximum deduction of INR 2,00,000 each financial year

  • Note: Tax benefits availed under Section 80CCD cannot be claimed again under Section 80C, i.e. the combined deduction under Section 80C and 80 CCD cannot exceed Rs. 2 Lakhs

Who are the Fund Managers?

The contributions invested in NPS are managed by 8 Pension Fund Managers (PFM) appointed by PFRDA. The Subscriber can choose any one of the below PFM’s:

• HDFC Pension Management Company Limited

• UTI Retirement Solutions Limited

• Kotak Mahindra Pension Fund Limited

• LIC Pension Fund Ltd

• SBI Pension Funds Private Limited

• ICICI Prudential Pension Funds Management Company Limited

• Birla Sunlife Pension Management Limited

What are the Investment Choices?

• Select the fund manager from the above list of 8 PFM’s

• Asset Classes to choose from:

  • Equity

  • Corporate Bonds

  • Government Securities

  • Alternate Assets

• Asset Allocation:

  • Active Choice:

    • Equity upto a maximum of 75%

    • Corporate Bonds upto a maximum of 100%

    • Government Securities upto a maximum of 100%

    • Alternate Assets upto a maximum of 5%

  • Auto Choice:

    • Investments across three asset classes (Equity, Corporate Bonds & Government Securities) in pre-determined proportion as per the age of subscriber.

    • The initial allocation across three asset classes remains constant till 35 years of age and thereafter allocation to equity gradually declines every year.

NPS Returns:

The figure below provides the returns of one of the largest PFM’s – HDFC Pension Management Co. Limited, which started managing NPS funds since 1st August 2013

Withdrawal Options:

• Partial Withdrawal –

  • After completion of 3 years

  • Withdraw 25% of his/her own contributions

  • During: illness, disability, education or marriage of children, purchasing property, starting a new venture.

  • A subscriber can partially withdraw upto a maximum of 3 times during his/her entire tenure in NPS.

• Premature Withdrawal –

  • After completion of 10 years or before completion of 03 years (if subscriber has joined NPS after 60 years of age),

  • Withdraw maximum 20% of the corpus as lumpsum and minimum 80% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension.

  • If the accumulated corpus is less than Rs 1 lakh, the entire corpus is paid as lumpsum to the subscriber.  

• Normal Withdrawal –

  • On completion of 60 years of age (if subscriber has joined NPS before 60 years of age) or after completion of 03 years (if subscriber has joined NPS after 60 years of age)

  • Withdraw maximum 60% of the corpus as lumpsum and minimum 40% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension.

  • If the accumulated corpus is less than Rs 2 lakhs, the entire corpus is paid as lumpsum to the subscriber.

In case of unfortunate event of death of a subscriber, the nominee / legal heir can withdraw the entire accumulated corpus.

FinFact:

• Numbers of NPS subscribers have grown from 6.5 million as on 31st March 2014 to 14.5 million as on 30th April 2021 – a CAGR of 12%!

• The total NPS contribution¹ has grown from INR 0.42 trillion as on 31st March 2014 to INR 4.16 trillion as on 30th April 2021 – a CAGR of 38%!

• The total NPS AUM² has grown from INR 0.48 trillion as on 31st March 2014 to INR 5.74 trillion as on 30th April 2021 – a CAGR³ of 42%!

How is NPS different from Public Provident Fund (PPF)?

• Period: PPF matures in 15 years with extension possible for further 5 years v/s NPS is till retirement or an extension to 70 years max.

• Returns: PPF are some-what fixed in nature, based on floating rate (currently 7.1%) v/s NPS returns are market linked

• Tax Exemption: PPF is completely tax exempt v/s NPS lumpsum maturity is exempt from tax and annuity income is taxable

• Eligibility: PPF is eligible to resident Indians only v/s NPS is eligible for all citizens between 18-65 years.

While a long-term commitment is required from a subscriber to stay invested in NPS, it is one of the best post retirement social security and is no doubt one of the best long term investment option for investors with a significant portion being tax exempt.

So why wait, join the NPS bandwagon now. Here is the link to open a NPS account!

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1. Contribution includes contributions made by NPS subscribers

2. AUM – Assets Under Management by 8 PFM’s

3. CAGR - Compounded Annual Growth Rate