How gig workers can start retirement saving early with equity funds, NPS

They should not overestimate their ability to extend their work life to make up for lower savings

Archana Ahuja (name changed on request), a Faridabad-based freelance information technology professional, is 45. Over the past couple of years, she has often found herself worrying about her lack of retirement savings. “With life spans increasing, I should save vigorously for retirement. But growing household expenses and my uneven income have made it difficult to do so,” she says.  

 

The fourth edition of the India Retirement Index Study (IRIS), conducted by Max Life Insurance and Kantar, reflects this concern. It found that white-collar gig workers in urban India are less prepared for retirement compared to the broader population, with a retirement preparedness score of 46 versus urban India’s overall score of 49. Gig workers’ financial index is 48, trailing the national score of 52. 

Why do they lag? 

Freelancers lack a steady monthly income. “Their volatile income makes long-term, systematic saving and investing for retirement difficult,” says Arvind A. Rao, founder, Arvind A. Rao and Associates.  

Another factor is the absence of automatic saving mechanisms. “Lack of contribution to the Employees Provident Fund (EPF) is a major factor,” says Deepesh Raghaw, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA).

Gig workers don’t have a fixed retirement age. “This flexibility makes them believe they can work longer to make up for their lack of savings. What they don’t appreciate is that health issues could make it difficult to extend their work life beyond a point,” says Avinash Luthria, Sebi-registered RIA and founder, Fiduciaries.  

Changes in workplace demands and competition from younger workers could make it difficult for them to get desirable projects.

While they lack access to EPF, gig workers can invest in the All Citizens Model of the National Pension System (NPS). “But adequate awareness about NPS is missing,” says Keval Bhanushali, co-founder and chief executive officer (CEO), 1 Finance. 

The ideal corpus  

By age 60, gig workers should have a corpus equivalent to at least 30 times their annual expenses. “The assumption here is that their corpus can generate at least inflation-matching returns,” says Raghaw. 

Bhanushali adds that the required corpus depends on factors like post-retirement lifestyle and location. 

Use the right instruments 

Gig workers can use products like equity mutual funds (MFs), Public Provident Fund (PPF), deferred annuity plans, and fixed deposits (FDs). 

Equity MFs: They are suitable if retirement is 12-15 years away. “Equity MFs allow disciplined saving and the benefit of compounding. However, investors should be prepared for market volatility,” says Rao. Investors must also resist the temptation to withdraw funds from these liquid instruments for short-term needs. 

Public Provident Fund (PPF): This is a sovereign-backed, risk-free instrument that offers a tax-free return of 7.1 per cent per annum. The restricted liquidity during the first 15 years ensures the corpus is saved for retirement. However, the inability to access funds before five years could pose challenges to gig workers who lack adequate savings in other liquid instruments. Contribution to PPF is capped at Rs 1.5 lakh per financial year. 

NPS: NPS is a low-cost product that offers high equity exposure. It also provides an additional tax deduction of Rs 50,000 under Section 80CCD(1B) of the Income-Tax Act. However, 40 per cent of the final corpus must be annuitised. Also, the product offers limited liquidity before retirement. 

Annuity plans: Deferred annuity plans can be considered for a portion of the retirement corpus that investors are willing to annuitise. “Besides providing a fixed pension for life, they allow one to lock the rate of return,” says Rao. 

FDs: A simple, liquid product, it is useful for building an emergency fund. It’s also suitable for less sophisticated investors. However, it is tax-inefficient. 

Raghaw emphasises the need for gig workers to align the asset allocation of their retirement portfolio with their risk tolerance and investment horizon. 

Points to heed 

Before they begin investing for retirement, gig workers should build an emergency corpus covering at least 12 months of expenses. This should be kept in liquid instruments like savings accounts, FDs, or liquid funds. Raghaw suggests gig workers must buy adequate health, life, and accident insurance as they won’t get any of these benefits from their employers. Rao advises starting retirement saving from the thirties to benefit from compounding. 

Some gig workers who work on contract for companies may get more than full-time employees due to the lack of EPF deduction and lower taxation. “By opting for the presumptive tax scheme (Section 44ADA), consultants with gross receipts up to Rs 50 lakh (Rs 75 lakh under certain conditions) can be taxed on 50 per cent of their gross receipts,” says Suresh Surana, a Mumbai-based chartered accountant. These savings should be channelled into retirement savings and building a financial cushion (emergency fund plus insurance). 

Luthria suggests gig workers should avoid insurance-cum-investment plans as they have high surrender charges. Finally, avoid overspending on child’s higher education and jeopardising your retirement.    

Presumptive tax: Reduce tax and compliance burden 

Section 44ADA of Income-Tax Act offers presumptive taxation scheme to resident individuals and partnership firms (excluding LLPs) in specified professions 

Eligible taxpayers’ gross receipts shouldn’t exceed Rs 50 lakh in a financial year, or Rs 75 lakh if cash receipts are 5 per cent or less of gross receipts 

50% of gross receipts is considered presumptive income; higher amount can be declared if desired 

No expense deductions allowed 

If income declared is below 50 per cent of gross receipts and exceeds basic exemption limit, maintaining books and audit are required 

Professionals with gross receipts exceeding Rs 50 lakh (or Rs 75 lakh, if applicable) must maintain books, undergo audit