The average lifespan in India is steadily rising over the years, due to improved standards of living and better healthcare among other factors. This, in turn, heightens the importance of retirement financial planning.
To address this need, the Government launched the National Pension System (NPS) in January 2004, initially restricted to government employees and later extended to all in 2009. Managed by the Pension Fund Regulatory & Development Authority, NPS is distinct from other pension schemes as it offers the choice of investment pattern. It gives investors the flexibility to allocate a percentage of their corpus towards equity, corporate bonds and government securities; the only limitation is the 50 per cent cap on exposure to equity. Compared to retirement schemes such as Employees’ Provident Fund, which does not invest in stocks, NPS is far more flexible on allocation to equity. Also, it has yielded an annual average return of 14.19 per cent (source: pfrda.org) in 2012–13, with possibility of higher returns.
Currently, NPS allows an investor to accumulate the corpus from the age of 18 under the Tier-I Pension Account or Tier-II Savings Account. The minimum annual contribution is Rs 6,000 under Tier-I Pension, and premature withdrawal is not allowed until the age of 60. Tier-II Savings permits premature withdrawal but requires a minimum balance of Rs 2,000 at the end of every year.
Restrictions on withdrawal help generate compulsory savings, with the benefit of compounding until the age of 60. At the same time, NPS offers the flexibility to draw up to 60 per cent of the retirement corpus on turning 60, to fund children’s marriages, housing and other needs. The rest should be used to buy an annuity from an IRDA-regulated service provider.
The scheme is professionally managed by reputed pension fund managers with regular monitoring by the NPS Trust under the overall supervision of PFRDA, thus making it well-regulated and transparent.
From tax point of view, NPS follows the Exempt-Exempt-Taxable basis, thus providing exemption at the stage of contribution and accumulation, and taxation during withdrawal. An individual’s contribution is deductible from gross income, but there is overall ceiling of Rs 1 lakh under Section 80C of the Income-tax Act, 1961. There is an additional tax benefit to the employee, wherein the employer’s contribution up to 10 per cent of the salary (as defined) is allowed as an additional deduction. In addition, the employer’s contribution is a tax-deductible business expense. Thus, employers may consider including the NPS in salary emoluments.
NPS has certain inbuilt merits, compared to conventional pension schemes, and should be explored as an avenue of investment and saving both by employed and self-employed individuals.
Poorva Prakash is Director, and Naren Kumar is Deputy Manager, Deloitte Haskins & Sells