NPS – A new Star on the Indian firmament

NPS – A new Star on the Indian firmament

My quest for financial independence actually started in 1987 upon seeing my seniors on board.

Everyone was senior to me and had already put in quite a few years in their careers.Some were spendthrifts others were savers.At the end of the day either of them did not have much of a corpus to make them comfortable into their retirement.

They were largely depending upon their PF which they hoped , in their own minds, will outlast them and all their future needs. Out of my innocent queries when I used to ask them the approximate corpus that they may be requiring their replies were evasive.Their replies also suffered from what I call fiscal myopia.

The situation really got me worried.All those sophisticated officers on board did not seem any better than the workers of the unorganized sector whom we also called labourers.But my seniors were oblivious of the fact.I searched for pension schemes in India and abroad (if we could invest in them) but found none that were tax friendly and could actually increase the value of your money till retirement.

Even the NPS (NATIONAL PENSION SYSTEM) has been around for about 10 years. However with the last budget of 2016-17 making 40% of the total corpus tax free this has become a very very attractive and compulsory avenue  for all government officers (hence I doubt the powerful IAS lobby will ever let any scam into this).

Those who have been reading my articles and have my book on Financial Planning, will recall that I always preferred mutual funds over NPS. I am still of the opinion that MFs are a attractive option but in addition to that you must start a NPS account and diligently start putting at least 15days to 1 month's salary in the account every year. Following are my reasons for the change in this strategy:

1.       NPS has 3 schemes with only a maximum of 50% allocated to equities rest in Cprporate and Govrnment fixed income assets.In long term this will protect your corpus as a compulsory requirement and you may consider this as SAVING rather than INVESTMENT. (I trust you know the difference between the two by now).

2.       At the age of 60, you can withdraw maximum 60% of the corpus for your bulk requirements , out of this 40% will be tax free and only 20 pc will be chargeable to tax at your existing income slab. The remaining 40% that you cannot withdraw will be used by you to buy a annuity (like a monthly salary) which itself is not taxable as of now but the monthly income out of the annuity will be taxable depending on your Income slab.

3.       The management charges of NPS are almost 1/10^th of the Mutual Funds. In the long run this will save you enormous money which will get compounded too.

4.       There will be an obligatory savings in the NPS which you will not be able to withdraw, but should something happen to the person, the money will be receivable tax free in the hands of the Nominee.

5.       NPS will serve as the cheapest insurance if you do not want to take one  ( like me) and your sum assured will keep increasing every year as the money grows. Even if you have taken an insurance this will act as a buffer whch will come across without any claim procedures that Insurance companies subject you to.

6.       Now and then when you do not maintain your NRI status, you will have an option of using the Rs.2,00,000 tax benefit.

So in view of the new rules, my strong suggestion to you is to open a NPS  TIER 1 account, online with the help of your PAN or ADHAAR card, by visiting Npstrust.org.in . You will only need an online bank account transaction facility (Net banking). Deposit the money at least once a month and avoid lumpsum investing.

Choose Plan E which has 50 pc equity allocation. You will have a choice of about 8 fund managers. Preferred are SBI, HDFC or ICICI.

The NPS works like mutual funds.Only that it is strictly monitored by PFRDA.

If you are a young cadet you have a fair advantage and I’m sure your parents will be very proud of you.

If you are a young officer  and have put in about 5-10 yers of service, you must have tried out a lot of things by now .For you it will be a good start to put away at least 15-20 days of salary away for those rainy days.

If you’re very senior and in fifties like me. You stand a great advantage by  having your money locked in for a very small period as at the age of 60 you can withdraw it or delay it upto age of 70 if the returns are good or you do not need the money. It will also be beneficial to you if you haven’ yet tried out Mutual Funds.

Since as a NRI you are not alllowed to save in PPF account and any Post Office schemes, this will prove to be a good avenue.

There have been a few people asking that when MFs have no lock-in and are tax free after 1 year, why not opt for them? Yes MF is better in those respects, but NPS maybe required for the very reason that you are against it. It is required in life that certain sum is left untouched till the boots are hung out to dry.However strong willed you may be .There could be a day when you may be overwhelmed by the astronomical returns and decide to consume your spoils of war.

It is for these reasons and thoe few people that NPS must be treated as a retirement scheme WITH HANDSOME RETURNS.

Let us calculate those handsome returns:

If you are 25 years of age today and saved ONLY Rs.15000 every month (i.e.1,80,000 annually) and you got a modest return of 10% y-o-y. Your kitty will be Rs.5crore 72.40 lacs. A modest amount of tax will be deducted only on the 20% of this amount.

I have received a lot of mails critical and simply queries as to how I have suddenly become supportive of something that I was vehemently against. To you and to them my reply is that I am not fixated with any financial instrument or plan .We must  keep changing with the opportunity at hand in terms of safety, returns and tax efficiency (in that order). Earlier NPS though was fulfilling first two conditions , it was not fulfilling the third. Now it is at least half way towards tax efficiency; to this if you will add the low maintenance charges- this becomes  clear winner. To this you add additional tax rebate on Rs.50,000  and becomes suddenly attractive.

However , I appreciate the skeptics , but only those who make cautious calculations and then arrive at results in a dispassionate way. Just sitting on the sides waiting for the opportunity will only make you miss the match. 

Tier II account: There is also a Tier II account in NPS. This can only be opened if you have a Tier I account. There is no lock in for this and there is also no tax benefit. However since the taxation upon withdrawal is as applicable this is not really very advantageous as compared to a Balanced Mutual Fund. I still have to find the details of the Capital Gains on TIER II account, but other details are same as for TIER I account. Since for the same fund manager and plan (E,C or G) the returns will be same for both Tiers , it remains to be seen if this can be a cheaper and hence more viable option to a Balanced Mutual Fund.

               For further details you may visit npstrust.org.in and go thru the FAQs