)
A few months earlier, Sunita Raj’s employer sent a mail to employees that they could subscribe to the New Pension System (NPS) henceforth. Raj doesn’t know if she should subscribe or not.
Raj’s employer, a media firm, is among the 25-30 companies subscribing to NPS every month. Most big names have been offering NPS for more than a year now — Infosys, Wipro, Reliance Industries, Muthoot Finance, Colgate-Palmolive, Capgemini and Pantaloons.
Sudipto Roy, business head at Principal Retirement Advisors, feels Raj should invest in NPS. “NPS is a good investment option for retirement planning. It has an in-built asset allocation structure which should generate inflation plus returns in the long term (with equity allocation of up to 50 per cent),” he says.
Also, Raj is in the early 30s and hence, has enough time to get the long-term returns from NPS. Additionally, Raj will have her contribution towards Employee Provident Fund (EPF) going alongside. Yes, this will result in a little less takehome pay but will be helpful in the long term. She only needs to be sure she can continue her contribution towards NPS as you can’t stop it even in desperate times, though EPF gives you that flexibility.
This apart, Raj would enjoy tax deduction for contributing up to 10 per cent of the basic and dearness allowance under Section 80CCD. Of course, EPF is completely tax-exempt. Though Roy feels NPS needs better tax deduction for investors to feel incentivised enough. This apart, NPS currently falls under the Exempt-Exempt-Tax (EET) treatment, which means contributions are not taxed, but the corpus accumulated till retirement is taxable at the time of withdrawal.
On the other hand, if Raj was in the last few years of her service. Contributing towards NPS wouldn’t have made sense you will not get great returns. In fact, having equities in the portfolio as you near retirement could jeopardise your savings. NPS allocates a maximum of 50 per cent of the corpus towards equities, reduced in line with the age of the investors. But someone near retirement could end up paying higher taxes on NPS contribution unlike EPF. So, such individuals could be better off increasing their contribution towards EPF or Public Provident Fund (PPF).
EPFO revisits its returns annually. But once fixed, it pays the same interest all year through (8.75 per cent for 2014-15). To that extent, EPF gives assured return. However, investment in equity does not allow NPS to offer guaranteed returns. Though the equity portion can help get higher returns, it is meant for younger individuals.
Sumit Shukla, CEO of HDFC Pension says there have been changes made to the proposed guidelines to make NPS a flexible product. “One, a corpus of less then Rs 1 lakh can be completely withdrawn prematurely and two, If one remains invested for 10 years, he/she would be allowed to withdraw up to 25 per cent of contributed amount after the tenth year followed by two additional withdrawals in a gap of five years. This can be done under certain conditions stipulated by PFRDA,” he says. EPF allows premature withdrawal of up to 50 per cent of the corpus on completing five years of service.
If at the time of retirement (60 years), one feels that he / she has enough money to sustain for some time, then the individual can leave the NPS corpus untouched till the age of 70. This keeps the subscriber invested in the fund, Shukla adds. Or, with NPS one can wait for up to three years on retiring if he feels the annuity rates are not good enough and invest 40 per cent of the corpus at the best annuity rate in those three years. “If one has to withdraw from NPS midway, he/she can get 20 per cent of the corpus in hand and use 80 per cent for annuity. Pension will start immediately, based on the annuity bought,” Shukla adds. But, the account will be closed on withdrawal. EPF account is not foreclosed on withdrawing.
