Initially, the New Pension Scheme received a very lukewarm response from the investors with not many subscribing to it. There were many considerations which had more drawbacks then its benefits. EPF or Employee Provident Fund was still a more lucrative retirement product than this scheme. To make it more appealing the scheme has gone through a lot of changes related to fund management, distribution and tax advantage.
In EPF along with EEE status, the most lucrative benefit is the flexibility of partial withdrawal for some important needs which arises in one’s life. This was missing in NPS and there was a huge demand for it from the investors. Then there were other lacunae’s like difficulty in operations, investment options capping etc. which was a hindrance to the acceptability of this product. Since then NPS has gone through a host of changes which now make it a more viable retirement product.
How NPS Funds Have Performed?
As on 06/03/2019
Let see what are existing rules now and how they benefit to its subscribers:
- Withdrawal During Service: Previously you were not able to withdraw from NPS before 10 years of services. But considering the needs of many middle-class families withdrawal is now allowed after 3 years of service. NPS subscribers can withdraw up to 25% of the contribution. This withdrawal can be sought for certain purposes like education and marriage of children, construction of a house, treatment for any specified illness. But you can withdraw only three times during the entire NPS subscription period.
- Increase in Joining Age: The entry age for NPS is now 65 years in comparison to 60 years previously. So now individuals under 6—65 years of age also can join the NPS system.
- Higher Equity Exposure– Having a cap on equity exposure was seen as a deterrent for the success of NPS. Young subscribers who are in the age of 20s have a sufficiently long horizon of their retirement and so they have a higher risk taking capacity. With a cap of 50% equity exposure, the accumulation for the retirement would have quite low. This is also true for subscribers who are at middle age but have a higher capacity to take a risk. PFRDA has enhanced this exposure to 75% now under active choice i.e. where subscribers make their decision of allocation. With a higher equity exposure, subscribers can look forward to more accumulation for their goal.
Ease Of Operation
With the digital revolution, the success of any investment avenue has shifted to ease of operations. NPS has evolved now in this are. Here is what makes investing simpler in NPS:
- Account opening– It’s completely online now. No more you have to visit the bank branch or any other intermediary office. Sitting at home or office you can open an NPS account. You can do so through your bank account, CAMS or even NSDL websites.
- Freezing of Account– Earlier the minimum contribution required was Rs 6000 p.a. which has been reduced to Rs 1000. Even the minimum amount of Rs 2000 and Rs 250 per financial year for maintaining NPS account has been waived off. Now you just need to make a minimum contribution of Rs 500 to keep the NPS account active.
- Scheme Preference– You can change the pension fund manager once in a year and investment option (active or auto choice) twice in a financial year.
- Mobile App: Millennials or young generation like to manage all financials through their mobile. NPS mobile application does this effectively. You can make your contributions and reset the password for your NPS account through this application. Put simply you can manage your NPS account while you are not at your desk.
Taxability of NPS corpus at the end was considered a negative point when compared to other option like mutual funds. The capital gains from equity mutual funds were zero which meant whatever you earn was tax-free. Contrary to this under NPS annuity is completely taxable and withdrawal was only exempted till 1/3rd of the corpus amount. This got relaxed later and today withdrawing 40% of the corpus at vesting age i.e. age at which annuity starts is exempted from tax. Though annuity is still taxable bringing back LTCG tax under equity Mutual funds mad NPS a comparable product for long term investments.
Looking at all the features above NPS is quite an attractive option now. Individuals who rely on the efficient allocation of their small savings and are unable to perform asset allocation should consider NPS to plan for their retirement. Though NPS gives options for withdrawing money early also wiser to adopt it only if you do not have other resources to plan.