National Pension System
has a triple tax advantage post budget. Salaried people can deposit 10% of
their basic plus D.A. in NPS up to Rs. 1.50 lakhs, this budget gave additional
benefit of Rs. 50,000 p.a. for investment in NPS by inserting a new section and
also your employer contribution to your NPS account also qualifies for tax
benefit. Is there any reason to cheer or investment needs to be assessed before
jumping into it. Most of the experts fill it is a good choice for tax and
retirement planning but to me NPS is not a promising solution. NPS was launched
in the year 2004 for all Government employees and in 2009 it was opened for all
to encourage investment for retirement. Surprisingly after 6 years of time still
people have not opted for it. The reason could be either there is no incentive
to sell NPS or scheme is not competitive compared to other investment options available.
I would like to highlight few important points so that you can take informed
decision before opening a NPS account.
1)
Not transparent:
Investment scheme needs
to be transparent about the portfolio and performance and should be easily
available for comparison. After 6 years also the portfolio and performance of
the different schemes under NPS is not easily available. I would not recommend
any instrument for long term investment which is not transparent. You can’t
keep your investment for rainy days whose details are not easily available. You
should note that not only schemes details of mutual fund products and unit
linked insurance plans are available at companies website but also many independent
agencies also track and give their ratings which helps investors to know where
his fund is moving.
2)
Not Liquid:
Investment needs to be
judged on three parameters, risk, reward and liquidity. There is moderate to
high risk in the NPS 3 options but it is not liquid. If you want to withdraw fund
before the age of 60 years, you can withdraw only 20% of the corpus and after
60 years you can withdraw 60% of the corpus only. Liquidity should be available
as the life is not so smooth and every person has to pass through good time and
bad time in his career. Liquidity is not always require for funding any future
goal or unexpected expenses but liquidity also helps you to switch to other
options if your investment is not performing well compared to other options.
3)
Tax Implications:
Pension amount
receivable after retirement under NPS is taxable and you have no flexibility to
plan for tax free income post retirement. It is also not clear whether the lump
sum withdrawal of 20% or 60% as the case may be is tax exempt or taxable. Most
of the expert feels the same is taxable. Still there is confusion over this and
government needs to clarify this at earliest. One need to know that even life
insurance pension products allows you to commute 1/3rd of the corpus
tax free on vesting date.
4)
No Immediate Pension Market:
There is lack of good
and matured pension market in India at present. Even today you will not get
good pension rate for your retirement. I remember that even when yield of 10
year Gsec was around 9% the rate of pension were not revised upward by any life
insurance companies and even today the rates are same. This clearly shows that
nobody is ready to guarantee for longer duration. You can’t plan your
retirement when you don’t have matured pension market ans your scheme forces
you to buy annuity.
5)
Maximum 50% in equity:
NPS is a long term
investment for retirement and allows only 50% in equity under scheme E. Normally
above 10 year time horizon you need to take higher risk by taking equity
exposure between 80 to 100%. If your long term investment does not beat
inflation by margin then you are definitely likely to struggle in later years.
To me 50% is very low exposure to equity for long term time horizon.
6)
Index funds not a good idea.
Even this 50% of equity
investment is done in index funds either in sensex or nifty stocks. Ours is a
growing economy and if we are aiming at double digit growth then you need to
invest in active funds. Index funds are passive funds and there is no role of
fund manager in selecting the stocks whereas fund manager in active fund can identify
growth or value stock from minimum 500 good companies listed on both the
exchanges. Good active funds have given 3 to 5% higher returns compared to
index funds over a 10 year period. Even taking exposure of 30-35% in mid and
small cap funds is not a bad idea for long term time horizon.
7)
Debt fund is a duration game:
Debt option under NPS
is not as safe as EPF and is subject to interest risk and default risk. If you don’t
understand this risk, you may have to face tough time if interest rates go up
when you are near to your retirement. You have to opt for minimum 50% in debt
fund under NPS either through Scheme C or scheme G. Both the debt schemes are
subject to interest rate risk and scheme C is also subject to default risk. At
present returns in these two schemes are good due to softening of interest
rates and which may not remain permanently. Interest rate also run in cycles
and could go up also if the inflation shoots up. The option of short term debt
and liquid fund is a must when you reach near to your retirement.
Tax incentive is just
like a sale with 20% or 30% discount but you have to be very careful while
going for it only because it gives you tax benefit. The Hon’ble financé
minister has tried his best to sell the NPS by offering additional benefit in
this budget, but you have to take informed decision as the investment is meant
for retirement. It is always advisable to consult a certified financial planner
and prepare a comprehensive financial plan.
this article first appeared at myiris.com on 1st April'2015
http://www.myiris.com/financial/storyShow.php?fileR=20150401170932043&secID=finan&secTitle=Financial&dir=2015/04/01
