Retirement corpus: Invest in NPS for higher tax-efficient returns

The portfolio in debt ETFs will not be more than 5% of assets under management of the corporate bond portfolio of the respective schemes.

In order to make the National Pension System more efficient, Pension Fund Regulatory and Development Authority (PFRDA) has tweaked the investment guidelines. It has allowed pension funds additional exposure of 5% of the corpus in short-term debt securities and related investments in Schemes E-1, E-II, C-I and G-I so that pension funds may deploy additional cash and cash equivalents during the highly volatile market conditions.

The regulator has also allowed pension funds to invest in listed debt securities issued by corporates, including banks and public financial institutions which have a minimum residual maturity period of three years or less from the date of investment, subject to a maximum limit of 10% of the corporate bond portfolio of the pension fund. Moreover, pension funds have been allowed to invest in debt exchange traded funds launched by state-owned entities. The portfolio in debt ETFs will not be more than 5% of assets under management of the corporate bond portfolio of the respective schemes.

The regulator has also underlined that pension funds should follow highest rating investment norms—AAA or equivalent—from two rating agencies registered with the Securities and Exchange Board of India.

Tax-efficient investments
The Centre introduced NPS in 2004 for all new employees and all state government employees too joined this defined contribution pension scheme. It was extended to all citizens in 2009. Experts suggest NPS must form a core part of one’s financial portfolio to build tax-efficient retirement corpus.

Private sector subscribers of NPS can invest up to 75% in equity under the active choice option. One can opt for the life cycle fund where the equity exposure will reduce as one grows older. The three life cycle funds are: moderate life cycle fund (with 50% equity cap), aggressive life cycle fund (LC 75) with 75% equity cap and the third, conservative life cycle fund )LC 25) with cap on equity at 25%.

Over the years, NPS has become one of the most tax-efficient financial products. A subscriber gets tax benefit of Rs 1.5 lakh under Section 80 of the Income Tax Act, 1961 for yearly contribution. Additionally, the subscriber gets a tax deduction for Rs 50,000 under Section 80CCD 1(B) of the I-T Act.

Moreover, NPS contributions made by employers, which can be up to 10% of the salary subject to a ceiling of Rs 7.5 lakh a year, is allowed as a deductible perquisite for employees. It is now an exempt, exempt, exempt (EEE) product, at par with Employees’ Provident Fund or Public Provident Fund, which means subscribers get tax exemption at the time of investment, accumulation and maturity.

While 60% of the maturity corpus can be withdrawn, the remaining corpus will be invested with an insurance company for life-long pension. However, the annuity payment every month or quarter will be taxed as income. Even partial withdrawal from NPS for emergency purposes is tax-exempt under Section 12B of Income-Tax Act.
An individual can now continue to invest in the pension fund till 70 years. The subscriber will have to write to NPS trust or any intermediary at least 15 days before turning 60 or retiring. The subscriber will also have the option to defer the purchase of annuity for a maximum period of three years from the date of turning 60 or retiring.

Tier II accounts
A subscriber can also open a Tier-II account in NPS from where he can withdraw money at any point of time. A Tier-II account can be opened only after the subscriber has opened a Tier-I account. One can utilise the services of pension fund managers, fix the asset allocation under this account and switch funds from Tier II to Tier I account online.

However, except for government employees, there is no tax benefit on the investment made in Tier II account as it does not have a locking period for funds which is there in case of Tier 1 account. Moreover, withdrawals from Tier II account are taxed. A Tier II account is like a debt mutual fund managed by pension fund houses.

Experts suggest that instead of parking surplus money in savings bank account one can look at NPS Tier II account for higher returns and easy liquidity. The redemption amount will vary depending upon the applicable NAV at the time of redemption and the money is transferred from trustee’s bank account to subscriber’s account in three working days.