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.
Not sure if an NPS can help you with tax planning? Reach out to us. Our team of experts will be happy to assist you with planning and optimizing your taxes. Contact us.