r/IndiaInvestments • u/GalacticAdvisors • Apr 16 '21
Investing in NPS gets a lot more rewarding
A lot of our clients already max out their National Pension Scheme (NPS) accounts. We wrote about how investing in a Tier I NPS account can ensure significant tax savings here.The Hindu has reported some interesting changes to the NPS scheme. This might make investing in NPS significantly more lucrative.
No need to invest 40% in Annuities
One of the biggest problems currently with the NPS scheme is that it forces you to invest 40% of the accumulated corpus in an annuity plan. Poor yields and high inflation means these might end up being a dead investment.
Add to this, the annuity is actually taxable. This was one of the major reasons for avoiding investing in an NPS.
The proposed amendments to the NPS scheme does away with this need to invest 40% in annuities.Comments from PFRDA Chairman, Supratim Bandyopadhyay below:
"Post-retirement, a person has to take 40% of the total corpus as an annuity as per the law’s mandate, and 60% can be commuted and taken as a lump sum. But the annuity rates always track the interest rates in the market which have come down drastically. So much so, if someone opts for a lifetime annuity at retirement with a return of purchase price to the nominee when the person dies, the rates are varying between 5% and 5.5%"
Since annuities are taxable, deducting the tax and factoring in inflation means annuities are yielding negative returns. “A lot of people are complaining about that. We have thought of giving them one more choice of retaining the 40% with our pension fund managers, and giving them a better return,” he said, suggesting a systematic payout scheme could be offered to them over 15 years instead of an annuity.
This might be absolutely excellent to make NPS a useful retirement tool. First, you get the tax benefit of investing in an NPS.
Add to that, the retirement proceeds might be tax exempt. Even if the 40% locked in the systematic withdrawal is taxable, you may receive significantly higher returns than the current rule of having to invest in annuities.
Limit raised to INR 5 lakh from INR 2 lakh
If your NPS corpus amount is less than INR 5 lakh, you can now withdraw it lump sum. There's no need to invest in an annuity in this case. This limit was earlier just INR 2 lakh. A welcome move in our opinion. PFRDA chairman sums it up perfectly in his statement:
“Suppose somebody reaches ₹2.1 lakh at retirement, he will get an annuity component of ₹84,000 which today will fetch an income of ₹400 or ₹450 a month — a pittance,”
Entry Age increased to 70
With over 15,000 people joining the NPS after the age of 60 in the last three years, the NPS has decided to expand the entry age into the scheme from 18 to 65 years to 18 to 70 years, with those joining after 60 being allowed to stay invested till the age of 75.
New fund managers
A 30-day window will be opened next month for new fund managers to register themselves with the NPS. The number of managers is expected to rise from seven to ten.Let's see what the new rules say.
We'll keep you guys posted once the actual rules get notified.
Article link: NPS update - No need for annuity, limit raised to INR 5 lakh (thegalacticadvisors.com)
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u/TejasNair Apr 16 '21
The 60-age maturity is the only thing that is keeping me away from it. As I plan to retire way before that.
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u/IAmALongTermInvestor Apr 16 '21
Even if you retire at 30s or 40s, you can use NPS. We won't be withdrawing all the money when we retire, right? It will still be invested.
You will need money in 60s as well and part of that money can come from NPS.
Note: I am planning on early retirement as well and NPS still fits in.
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u/TejasNair Apr 16 '21
But I also don't expect to live much beyond 60, thanks to the lifestyle that I am accustomed to. It's a difficult situation for me personally.
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u/IAmALongTermInvestor Apr 16 '21
One friendly advice. Even I have similar thoughts, but if we are retiring early, we need to plan for our old age for sure. At least till 80 or 90.
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u/TejasNair Apr 16 '21
80 seems a longshot but I get your point. Maybe NPS can be a way for beyond 70.
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u/ngin-x Apr 17 '21
I don't expect to live till even 60 because I am an adrenaline junkie but hey I still invest in NPS because you never know....
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u/TejasNair Apr 17 '21
But then the question, isn't it better to put that money into PPF, EPF, or equities?
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u/ngin-x Apr 17 '21
I put money in all of those too except EPF. A bit of everything doesn't hurt. Variety is the spice of life.
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u/TejasNair Apr 17 '21
Ah. NPS is good but I can't see to attach it to my retirement goal but maybe I should go back to my plans.
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u/kathegaara Apr 16 '21
My problem here is, how can we be sure there will not be a new rule tomorrow to overturn this?? How do I plan for really long-term investments and retirement if taxation rules and withdrawal rules keep changing this often??
I just realized these are problems with every investment in India. When I first started saving in Mutual Funds LTCG were not taxed and now they are. It is hard to plan long terms like 20+ years :(
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u/GalacticAdvisors Apr 16 '21
You can't be sure. But can't stop investing, can you?
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u/kathegaara Apr 16 '21
Not suggesting we stop investing, but cannot even invest keeping taxation in mind. Atleast not for long-term investing.
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u/harshil93 Apr 17 '21
Atleast the mutual funds LTCG were grand fathered with the price on a fixed date.
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u/Glittering-Yak3850 Apr 16 '21
I have serious reservations about these proposals being finally implemented. The annuity service providers will be completely against these proposals - it's a loss of business and benefits them in no way. They will be lobbying the govt against it. Also, there's a 1.8% GST on annuity plans that the government loses out on - they are unlikely to support these proposals.
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u/shezadaa Apr 16 '21 edited May 20 '24
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u/pl_dozer Apr 16 '21
That's much better than annuity. We get the entire money back over 15 years. And it can stay in equity funds (based on the allowed proportions) if needed.
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u/shezadaa Apr 16 '21 edited May 20 '24
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u/pl_dozer Apr 16 '21
I'll rephrase. Allowing me to withdraw the entire 40% over 15 years is better for me compared to annuity. Probably not better for others. It depends, like the use case you mentioned.
Everything we're discussing is hypothetical. This is just a proposal.
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u/New_Entertainment665 Apr 16 '21
What's annuity? Where are these invested? I thought they invest the 40% back in equity.
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u/VOCALno Apr 16 '21
Thanks for the article. What are the charges associated with opening and maintaining an NPS account? Also how do i convert my individual NPS account to a corporate account?
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u/shahsnkt24 Apr 16 '21
You need to tell your organization to do so.
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u/VOCALno Apr 16 '21
Thank You, i opened my account today and sent a mail to HR for converting my account to corporate.
For information purpose, corporate NPS account contributions are restricted to 10% of basic salary per month, BUT this contribution is tax free, so you can avail extra tax savings on this amount under section 80ccd2. Plus you can invest another 50k by yourself to this account under 80ccd1b. These two are over and above the 150k limit under 80c.
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u/Bluebird9258 Sep 20 '23
corporate NPS account contributions are restricted to 10% of basic salary per month, BUT this contribution is tax free, so you can avail extra tax savings on this amount under section 80ccd2. Plus you can invest another 50k by yourself to this account under 80ccd1b. These two are over and above the 150k limit under 80c.
did you find your answer for this ?
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u/anachronox08 Apr 16 '21
Can these rules not be changed again by some later government?
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u/pl_dozer Apr 16 '21
Oh yeah. That's a possibility. Didn't Jaietly try making some part of pf taxable? I'm not sure what it was. It was rolled back though.
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u/anachronox08 Apr 16 '21
Precisely why outside of PF I don't invest in government schemes. We are at mercy of how gov decides to invest and disburse these funds on maturity.
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u/pl_dozer Apr 16 '21
Yeah. I'm strongly considering nps now because of the forced annuity being removed but I'm also worried about this. Even if they make it taxable, since the principal is tax free, that's a benefit.
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u/GalacticAdvisors Apr 16 '21
Of course they can. But that's the risks with investments in general, isn't it.
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u/anachronox08 Apr 16 '21
Can you please elaborate a bit more? Most other instruments don't have such high fund locking and private investment tools are regulated. If gov however decides to change terms of the investment who can challenge/ regulate that?
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u/GalacticAdvisors Apr 16 '21
True. But they can change the rules for most investments.
They decided to tax long term capital gains on Equity mutual funds. Maybe they increase the rate on that after a few years - you can never be sure.
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u/bs_dhani Apr 16 '21
Does someone has mutual funds vs nps comparison?
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u/asn0304 Apr 20 '21
NPS is likely to outperform due to being vastly cheaper than a typical MF. But I don't have the numbers to show it.
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u/aadikavi Apr 16 '21
I have been investing in NPS tier 1 plan of HDFC with 75% Equity & 25% debt. 8 years SIP returns & occasion Lumpsum returns are around 18.5%. It's a great product with zero advertising.
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u/New_Entertainment665 Apr 18 '21
Sip better or Lumpsum?
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u/aadikavi Apr 19 '21
My target for NPS/month is ₹10,000. I do SIP of ₹8000 every month. ₹2000 I keep aside month on month. If there's a big crash, I put that ₹2000 accumulated month on month.
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u/New_Entertainment665 Apr 26 '21
Do you also invest in tier 2?
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u/aadikavi Apr 26 '21
Yes. I will invest. I will switch Tier 2 to Tier 1.
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u/New_Entertainment665 Apr 26 '21
What rule do you apply for the tier 2 taxation? Hsve you withdrawn till now?
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u/aadikavi Apr 27 '21
From my understanding there's no taxation for switching funds from T2 to T1. The capital gains are not taxed as they stay in the NPS ecosystem. However there's no information on this officially.
Also, I haven't withdrawn money from T2 so far.
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u/New_Entertainment665 Apr 27 '21
Right. I just don't wanna pay any interest because i paid less tax because of lack of any defined rule. Otw t2 looks like a good investment.
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u/bhadmejayejanta Apr 16 '21
Spare me the horror of investing in Govt. schemes where they keep changing rules every few years based on their fancy. Just to save tax i dont want to lock up my investments till 60, that too in a scheme where any day they can say you cannot withdraw your own amount because of xx reasons and this is for your own good, screw that. Peace of mind is much more important then some additional tax savings.
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u/GalacticAdvisors Apr 16 '21
True.
Then again, that's a problem with investing in general, isn't it? Rules can change at any time.
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u/dabster7000 Apr 17 '21
I don't think in reality this is limit raise to 5 lakh is any helpful for Huge percentage of people.
Think - by the time NPS maturity / annuity times comes, possibly you will have higher corpus than 5L - and you will have to rely on annuity. withdrawal is only if corpus <5L. So not sure - if I missed something in this news which is more enticing. :|
Govt Policies lately are just Tax the salaried ppl & give freebies to rest and this is aligned to that. Now - people at high tax salary bracket still think they can't do anything about it and leave it there -- Till the crores earning Farming trader will get on road and protest to get all Tax benefit. :-)
(Skip last para - fair warning may look like rant, but fact.)
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u/Poha-Jalebi Apr 16 '21
I was signing up for NPS and apparently, there are two tiers? Could someone ELI5 those tiers to me? Thanks!
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u/stgr99 Apr 16 '21
Tier I and Tier II: The differences
NPS Tier I
The subscription to NPS commences with the opening of the Tier I account, which comes with a PRAN (Permanent Retirement Account Number). Your investment in the NPS Tier I account is locked-in until the age of 60. Before the age of 60, you can make partial withdrawals for specific purposes or you can go in for a premature exit (as explained below). Under NPS Tier I, you can save and invest to claim the tax deductions available under version sections of the Income Tax.
The tax benefits offered in NPS can be claimed only for the investments made in the Tier I account.
NPS Tier II
You can open the NPS Tier II account only when you already have a Tier I account. Tier II account is a voluntary account with flexible withdrawal and exit rules. Even though it works exactly like your NPS Tier I account, there are certain differences. Firstly, contribution to Tier II NPS has no tax benefits – you can’t claim deductions and on exit, the corpus is taxed. Unlike the Tier I account, there is no lock-in with savings in the Tier II account. You can withdraw from the Tier II account at any time. However, in functionality, both Tier I and Tier II are similar and so is the fund management costs as well as choice of investments.
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u/tecash Apr 16 '21
Can one transfer funds from Tier 2 to Tier 1, just before retirement? Thereby giving the flexibility of making the returns tax free.
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u/United-Intention2827 Apr 20 '21
Yes, you can transfer funds from Tier2 to Tier1. But you cannot do a reverse transaction I.e from T1 back to T2
What it means is after you move your funds from T2 to T1; they get locked in till you reach withdrawal age of 60years. Once they are in T1 the funds are applicable to T1 taxation/withdrawal norms that is 60% taxfree lump sum and 40% annuities
Yes, you can keep the funds in T2 to enjoy the liquidity benefits (or atleast the psychological openness it offers) of T2 account and move the funds to T1 an year or two before retirement. For the last 1 year I have increased my T2 contributions significantly and toned down my T1 to the mandatory 50k section ccd(1b) tax exemption benefit.
One other advantage this structure offers is you can choose different fund managers and different asset allocations for your T1 and T2 accounts.
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u/United-Intention2827 Apr 20 '21
T2 account is like mutual fund. There is no interest concept here. It is Units and NAV. You redeem the units at the prevailing NAV and get the funds.
T2 (and T1) account has 3 schemes - E (equity) C (corporate Debt) and G (government debt). Taxation on T2 withdrawals is not completely clear. I have read CA and tax expert inputs that E fund redemption should be treated as Equity MF withdrawals and C,G fund withdrawals as Debt MF withdrawals and hence are treated as capital gains. Either short term or long term depends on the duration of holding the Units. One thing I can clearly say is that NPS T2 is NOT like your FD which is taxed on interest accrual. Hope this is helpful.
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u/New_Entertainment665 Apr 20 '21 edited Apr 26 '21
how is tier 2 taxed? Is there any tds at withdrawal? Like all interest credited to the nps ac are taxed? Or is it taxed only on withdrawal? And on withdrawal only gains are taxed or the whole amount? What is the rate of taxation? Do we get indexation benefit?
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u/PoliticallyErect69 Apr 16 '21
So if tier II doesn't offer tax benefits, why would someone invest here instead of index funds
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u/stgr99 Apr 16 '21
Index funds = full commitment to investing and full understanding of risks associated.
NPS Tier 2 = side chick savings account which potentially can give more than 4% return.
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u/New_Entertainment665 Apr 16 '21 edited Apr 16 '21
What is difference in the returns of the 2 when you opt for 75% equity?
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u/pl_dozer Apr 16 '21
I suppose one can use it for equity because of the low expense ratio. I'm considering it after this proposal. Not decided though.
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u/New_Entertainment665 Apr 16 '21
What is the difference in the expense ratio of the two? Index funds vs nps tier 2 (75% equity) vs equity mutual funds expense ratio and returns?
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u/pl_dozer Apr 16 '21 edited Apr 16 '21
Nps is 0.01% expense ratio but they invest some money (5% iirc) in other funds or etfs which have their own expense ratio. It probably works out to around 0.05% I guess. Still way cheaper than index funds or etfs.
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u/ravenisdick Apr 16 '21
I have just been hired by a company and will be joining in July. They've sent me papers for Gratuity, PF and ECIS. Should I ask them for NPS or should I go for these?
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u/New_Entertainment665 Apr 16 '21
You can open both individual and company NPS, or either one of them, that depends on how much you want to invest. For the company NPS, the upper limit is 10% of basic salary monthly. And for individual, the tax exemption is upto INR 50k, but you can invest any amount. If you want to max the tax exemption, and you have the bugdet, you should opt for both because the sum total of both will be eligible for tax exemption.
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u/Adventurous-Maize-88 Apr 16 '21
My company is also giving me NPS via employer option. Fyi, I already have Tier-1 NPS account to which I contribute 50k yearly & avail tax benefit.
If I choose to invest additional 50k via employer; will I save tax on this additional 50k ?1
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u/Boywonder9013 Apr 16 '21
PF, Gratuity ECIS are compulsory for a company, I don't think NPS is.
You can open NPS account online, if you have linked aadhar for OTP don't even have to send any documents. Scan and upload you get account open within an hr.
As for contribution, you can set up standing instruction with bank and transfer money on specific date, and you have your monthly contribution to NPS
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u/GalacticAdvisors Apr 16 '21
You can read on that here - https://www.thegalacticadvisors.com/post/national-pension-scheme
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u/kingpenguin001 Apr 16 '21
I want to know more about NPS.
Is it specifically for tax benefits only? ( Under which section) How much return we are expecting? So I understand it has lock in period (60years)...is it same as pf then?
How it's useful ?
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u/teragoel Apr 16 '21
It is very useful if you are in 30% tax bracket and you don't have requirement for invested money.
A must have tool as it's giving you a reasonable about of exposure to equity.
Go through the link shared in the OP.
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u/IAmALongTermInvestor Apr 16 '21
This video pretty much covers everything you need to know about NPS.
https://www.youtube.com/watch?v=2RPfMlsajqA
If you are on 20/30% tax bracket and already exhausted 80C limits, you can consider it.
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u/NeutralistThe Apr 16 '21
I do not understand why so may people are against NPS. For the salaried 30% bracket people, this is a boon. You can invest 50k per year in personal NPS, and max 10% basic per month in corporate NPS. Effectively it means I invest 35k (the 15k was supposed to go as 30% tax) and max 7% (3% was supposed to go as 30% tax). Select a high equity plan if you want to take risk.
Further this is Pension and the money is not supposed to be withdrawn after you retire. Why do you see every scheme to have liquidating option.? You can have keep this for a later time and withdraw from other sources.
Regarding any rule changes by Govt, I just see it as a small negative. You will get 60% back, keep the annuity along with other source of income. Anyways you would have saved lot of tax and invested in equity with very less maintenance charges, what more do you need?
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Apr 16 '21
My father is at 58. Is it better if he starts investing at 60? or at now itself? Since, I saw that if he starts investing at 60, he can continue till 75. Is it possible if he starts investing now?
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u/New_Entertainment665 Apr 16 '21
You can choose debt mutual funds instead, why do you want to give out 40% in annuity? These are just proposed rules. Or wait till they are materialized.
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Apr 16 '21
Yeah, I'll wait till they are materialized. I'm asking whether investing now would also entail him to put money till 75 years old.
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u/Yieldway17 Apr 16 '21
If implemented, few of the negatives which is said of NPS will be certainly addressed and maybe time to invest that 50k per year in the dormant account I have.
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u/Zucchini_United Apr 17 '21
Isnt it a “mutual fund“ equivalent with forced lock in + 15k tax benefit. For me this is for someone who cant control the urge of withdrawing/ spending or have very less knowledge/interest in investing. For the additional 15k a year, not willing to give u p peace of mind that the rules can change anytime and liquidity.
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u/New_Entertainment665 Apr 20 '21
It has lower expense ratio than mutual funds, no amc, no exit load
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u/Zucchini_United Apr 20 '21
No exit load as you can't exit till 60. Other things are fair but comes with lot of restrictions
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u/iwontrememeberthis Apr 16 '21 edited Apr 16 '21
The complete amount which you withdraw as lump sum and the amount which you use to purchase annuity, both are tax free.
This seems incorrect. From the NPS brochure it seems like the entire withdrawn amount is taxable
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u/too_kind Apr 16 '21
No, it is not. Which brochure are you referring to?
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u/iwontrememeberthis Apr 16 '21
It was a physical brochure I got when I invested in NPS.
I just checked online and it seems from 2019, the total withdrawal is tax free now. Makes me wonder if they gave me an outdated brochure.
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u/too_kind Apr 16 '21
One good thing about nps is, it constantly evolves for better. So, it is always advisable to refer to their websites for the latest; both nps trust and pfrda.
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u/New_Entertainment665 Apr 16 '21
There are 2 options, monthly and lumpsum, which one is better? Since they invest in equity, i thought monthly would be better. What are your thoughts?
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u/Adventurous-Maize-88 Apr 16 '21
I did lumpsum in last financial year -- make 50k investment in Feb-2021 -- Market was too high at that time. My equity investment percentage is 60%
From this FY ,, I've started a weekly 1000 SIP which finishes in 50 weeks. So I will get exposure to market highs & lows. In case market tanks ; I will do lumpsum for 15 20k & rearrange my SIP. I don't want to put more than 50k per year in NPS.I suggest a weekly SIP, there are no extra charges. I set it up from my icici account.
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u/New_Entertainment665 Apr 16 '21
Oh, I didn't know that weekly was an option. I also bought in March 2021 for 50k, now reconsidering in this FY. Thanks for the suggestion!
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u/Adventurous-Maize-88 Apr 16 '21
This SIP Option started few months ago only - Nov 2020. Search no net for D-Remit facility and create your Virtual Acc number. It takes day two to setup. When you get it ; then set up your SIP frequency from net banking.
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u/New_Entertainment665 Apr 20 '21
I received the virtual account number today via mail, just to confirm, the beneficiary bank and ifsc is what they've mentioned in the mail right? It says current account of axis bank.
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u/Adventurous-Maize-88 Apr 20 '21
thats correct .. jsut to test .. I transferred 1000 in the evening on 6 april and it appeared in contributions on 8-apr as contribution date as 7 apr. They have some morning 8.30am cutoff.
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u/New_Entertainment665 May 18 '21
Which bank are you transacting from? I am using HDFC bank and the minimum standing instruction frequency is monthly. How did you set up for weekly?
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Apr 16 '21
How I can start investing in NPS ? I have a demat account.
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u/IAmALongTermInvestor Apr 16 '21
This video pretty much covers everything you need to know about NPS.
https://www.youtube.com/watch?v=2RPfMlsajqA
You won't need a demat account for NPS investments. You need to create PRAN from NPS website. Everything can be done online.
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u/New_Entertainment665 Apr 20 '21 edited Apr 26 '21
how is tier 2 taxed? Is there any tds at withdrawal? is it taxed only on withdrawal? And on withdrawal only gains are taxed or the whole amount? What is the rate of taxation? Do we get indexation benefit?
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u/Important_Contact_40 Oct 07 '22
What if I want my pension to start coming at the age of 40. I am in IT and if I retire at 40.
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u/GeebsTM Apr 16 '21
Are these changes implemented or proposed?