The additional deduction under Section 80CCD is likely to make NPS amore popular option for retirement money. Those in the 30 per cent tax bracket will especially benefit, as they can save up to ₹ 15,450 in tax a year only by using the additional ₹ 50,000 limit. There are 84,000 NPS accounts opened by retail investors, with an estimated 500- 600 added every month. Observers believe the number of retail accounts might double in the next one year. Assuming an addition of 100,000 customers, each bringing an average of ₹ 30,000, the total NPS corpus could rise by about ₹ 300 crore in a year.
There was not much interest in NPS, as there were too many tax saving options clubbed under the Section 80C window. But, the separate tax break will attract investors. We have already seen a lot of enquiries about the product at various points of purchase in the past few days.
NPS might move up the popularity charts but investors should not ignore the retirement plans from MF houses. Here is how the two products compare:
Asset allocation
Existing MF retirement plans offer a standard asset allocation, say, 60: 40 in equity or 70: 30 towards debt. Under the auto- choice option of NPS, however, the asset allocation changes by age. Allocation to equity is capped at 50 per cent till the age of 35 and then reduces every year by two per cent, such that by the time you reach 55, only 10 per cent is in equity. This can be a positive for those who want automated asset allocation. No other product in the country offers this kind of option.
Returns
Both these products are market- linked and do not offer guaranteed returns. Apart from the auto choice, NPS allows you to opt for active choice. Investors can choose between Scheme E( up to 50 per cent investment in equity), Scheme C ( corporate bonds) and Scheme G (government securities).
The drawback of NPS is you cannot invest more than 50 per cent in equity, and the investment will be restricted to Nifty- 50 stocks, in the same proportion as their weight in the index. MF retirement plans have no such restrictions.
At present, though, only Reliance MF has an equity- oriented retirement option, which can invest anywhere between 65 per cent and 100 per cent of the corpus into equities. The other two pension schemes, Franklin India Pension Fund and UTI Retirement Benefit Pension Fund, invest up to 40 per cent in equities and the rest in fixed income instruments. However, more fund houses are expected to come up with equity options in the future.
Experts believe that restricting investment to Nifty stocks might impact the returns of NPS but will make the portfolio less volatile. They feel one can expect returns of 10- 12 per cent for NPS under the auto choice option over 15- 20 years. The returns are expected to lag returns of equity- oriented MF plans. Young investors below 30 years of age might want to allocate 60- 70 per cent of their retirement portfolio in equities. NPS doesn't allow this option.
Also, restricting equity investment to Nifty- 50 stocks will impact the funds capability to generate alpha.
The other problem with NPS is that returns are disclosed monthly, quarterly or six- monthly.
It is difficult to actively track the fund performance, unlike in a retirement MF plan, where the net asset value is displayed every day.
Cost
NPS is currently the lowest- cost pension product. Fund management charges for NPS are 0.01 per cent, much lower than the 2.2- 2.5 per cent charged by MF pension plans. Even accounting for the additional 0.25 per cent paid to the intermediary, NPS is still 200 basis points cheaper than an MF pension plan. However, active fund management in the equity corpus of MF pension plans could still tip the scales in their favour.
Taxation
The biggest drawback for NPS at present is that the corpus at the end of 60 years of age will be fully taxable. This is because the product is classified as EET ( exempt on contributions made, exempt on accumulation but taxed on maturity). Not many people understand the difference between tax- saving and tax- deferral plans. NPS is a tax- deferral plan. You don't pay tax now but will do so on withdrawal. Public Provident Fund ( PPF), Employees Provident Fund ( EPF) and Equity Linked Savings Schemes are examples of tax saving plans. So, for NPS, the entire corpus withdrawn is added to your income and taxed in line with your applicable slab rate. This could significantly eat into your returns during retirement, especially if in the highest tax bracket. And, even returns from annuity insurance plans are not tax- free. The only way to reduce tax incidence would be to stagger the amount you withdraw over several years but this might not be feasible for many.
In the case of MFs, debt- oriented pension plans are taxed at 20 per cent with indexation but this tax will be negligible or nil if the holding period is more than 10 years. An equity- oriented pension plan will be completely tax- free if units are held for more than a year. Even in a debt plan of an MF, you pay tax only on returns. In NPS, even the principal is taxed. This can be a deal breaker for many.
Annuity
In an NPS, even after turning 60, at least 40 per cent of the corpus has to be compulsorily annuitised.
Retirement plans give the flexibility to withdraw when required. Exit loads of one to three per cent have to be paid only if the amount is withdrawn before, say, three or five years. Strategy Those under 30 will be better off with equity oriented pension plans of MFs rather than NPS, as the equity allocation is much higher. Some experts believe debt- oriented pension plans of MFs score over NPS for those nearing retirement as well. Even close to retirement, you can still have 25- 30 per cent in equity. This way, if you survive 25- 30 years after retirement, you can make sure you don't outlast your savings.
He added that investors can continue to keep some money in these plans and opt for systematic withdrawal every month. He feels returns from these plans can easily beat the annuity returns of six to eight per cent from NPS.
Even if retirement MF plans score over NPS in many ways, the reality is these funds are likely to remain at the bottom of the pecking order.
As of now, PPF and EPF manage about ₹ 12 lakh crore, NPS has a total corpus of 80,000 crore and retirement plans manage barely about 1,800 crore. Retirement plans will take time to become popular. The migration will first happen from PPF and EPF to NPS, and then from NPS to these plans. Also, NPS will become a much better choice if its taxation structure is changed to EEE.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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