National Pension Scheme (NPS) has not been a very popular investment option so far. Besides it being tax inefficient until recently, i...
National Pension Scheme (NPS) has not been a very popular investment option so far.
Besides it being tax inefficient until recently, it lacked a push from the distribution fraternity due to its low incentive model. In addition, there was only a 50% participation allowed as maximum towards equity.
The Aadhar based e-KYC and e-sign gave a philip to the online distribution and we hope that this momentum would continue (currently Aadhar based KYC and registration has been suspended and so is the e-sign).
On December 06, 2018, the union cabinet decided that the entire 60% of the value which can be withdrawn at the age of 60 will be tax-exempt.
Previously only 40% of the accumulated corpus utilised for the purchase of annuity was tax-exempt and the balance was taxable.
Union cabinet’s recent decision will put NPS on a similar footing to PPF in terms of taxability. The additional benefit will be that now mutual fund investments have a 10% long-term capital gains tax for equity oriented investments and for debt oriented schemes the taxation is 20% post-indexation. For NPS investors this would be Nil. Given that upto ₹ 50,000 is allowed as a deduction u/s 80CCD this can give a good booster to investment in NPS.
Moreover, under Tier-II account, the deduction can now be availed of under section 80C on similar lines of ELSS funds with a lock-in of 3 years. With a tax differential of 10%, this could be a superior investment alternative.
The only drawback of NPS is, one can get only upto 75% equity exposure subject to the age limits. Under Tier-II account, the corpus can be withdrawn anytime after 3 years and that’s not subject to the restrictions of Tier I investments.
Ideally for investors who do not want a 100% equity exposure, this could again be a good option for investment.
Still 75% equity exposure might be good enough to enhance returns over long term. In addition, the funds have a mandate to invest in stocks upto market capitalisation of Rs. 5,000 crores which as per the latest list available on AMFI website would translate to a basket approximately 370 stocks.
NPS has become an attractive investment proposition to build a corpus for retirement. You may consider allocating at least Rs 50,000 to it.