Financial advisors tell you to not make frequent tweaks to your retirement plan. But if you have diligently followed this rule, the authorities haven’t. There have been a bunch of changes, both good and bad, to the two large retirement vehicles favoured by Indian savers — the Employees Provident Fund (EPF) and the National Pension System (NPS) — in 2016. If you are confused by the twists and turns, here’s where they stand today.Employees Provident Fund
The EPF, the default retirement vehicle for most salaried employees, saw changes to its investment pattern, returns, withdrawal rules as well as structure this year.
Positive changes first. 2016 was the first full year after the EPF took its first baby steps into the equity market. The fund’s decision in August 2015 to park 5 per cent of its incremental flows in Nifty and Sensex ETFs paid off, with the fund recording a 13.2 per cent return on this investment by August 2016. This prompted a decision to double the equity allocation to 10 per cent of incremental flows (₹13,000 crore) in FY17. Given that the last few months have been rocky for equities, the returns may stand at the low single digits this year. But given that over 80 per cent of the EPF portfolio is now parked in Central or State government securities, the equity component can deliver a much needed long-term kicker to your returns.
Sliding interest rates forced the EPF to announce an interest rate of 8.65 per cent in FY17, down from 8.8 per cent last year. But the return, which is tax-free, remains quite attractive in relation to every other long-term assured return option — be it the Public Provident Fund (8 per cent), National Savings Certificates (8 per cent taxable) or even tax-free bonds (about 6.5 per cent). In other good news, the EPF has also trimmed its administrative charges from 0.85 per cent to 0.65 per cent.
The EPFO’s move to enable account portability through the issue of a Universal Account Number (UAN) made good progress in 2016, with over 8 crore UANs issued and 2.93 crore subscribers activating them online. The UAN allows employees to seamlessly port their PF account from one employer to another. Soon it may also enable online transactions.
On the flip side, the 2016 Budget tried to introduce an EET (Exempt-Exempt-Tax) regime for the now wholly tax-exempt EPF. But this was thankfully rolled back.
Another controversial move was a notification in February barring employees from withdrawing their full PF balance before the age of 58. After nationwide protests though, this notification was withdrawn in April.
As of now, employees can withdraw their EPF balance before the age of 58 if they are unemployed for 60 days. Employees who would like to take an advance, while in service, can do so under special circumstances, after proving that they need the funds for purchase of a house, medical treatment or marriage or professional education of children.National Pension System
With the Centre quite keen to push the market-linked NPS, the scheme ushered in flexible features and received new tax breaks in 2016.
More choices were added to the investment menu. For one, two more options were tagged on to the ‘lifecycle fund’ — which automatically pegs your equity allocation at 50 per cent and reduces it as you age. Now, you can opt for an ‘aggressive lifecycle fund’ which kicks off with a 75 per cent equity allocation, more suitable to a twenties investor. The new ‘conservative lifecycle fund’ with a 25 per cent starting equity exposure, may be suited to older investors. The year also saw the regulator add a new asset class ‘Alternative Investment Funds’ to the existing menu of equities, government securities and corporate bonds, available on NPS. The exposure is capped at 5 per cent, but given that this includes REITs, Invits, private equity and other untested vehicles, it seems best to wait for a track record before investing.
So far, if you opted for the NPS, you get to choose from a menu of eight pension fund managers (PFMs) who manage money on your behalf. The PFMs are set to expand shortly to nine, with the regulator inviting fresh bids for PFMs this month. Earlier, the managers were chosen on the basis of their ability to bid the lowest fees. But in the latest round, PFMs have been allowed to offer differential fees provided they stick to a cap of 0.1 per cent of assets. This may mean better fund managers at the disposal of NPS investors, at still reasonable costs.
The NPS has traditionally suffered from a big tax disadvantage vis a vis the EPF and PPF. While initial investments earn tax breaks aggregating up to ₹2 lakh a year, the final corpus (not used to buy annuities) was entirely taxable at slab rates at retirement, thus subjecting NPS to an ETT regime (both accumulations and returns get taxed).
. In 2016, the Budget exempted 40 per cent of the accumulated corpus under the NPS from income tax, if withdrawn at retirement. Of the remaining 60 per cent, 40 per cent is already tax-exempt as it has to be compulsorily used to purchase an annuity. (The annuity income will be taxed, though). The remaining 20 per cent alone will now be taxed (at slab rates) on withdrawal. While this still doesn’t put NPS on par with EPF or PPF, it makes it more attractive than before.
Until recently, the withdrawal rules for NPS were highly restrictive , with exit available only at 60 or on subscriber’s death . Premature withdrawal required parking 80 per cent of the sum in an annuity. But in 2016, the NPS has allowed withdrawal of up to 25 per cent of contributions for specified reasons, if the scheme is atleast 10 years old .