In last two years government has been trying to make NPS the preferred choice for Pension product for Indians. It started with the tax exemption of up to Rs 50,000 for investment in NPS u/s 80CCD(1B) in Budget 2015. This year has been pretty dynamic for NPS as PFRDA (Pension Fund Regulator and Development Authority) which administers NPS has made the following 6 changes:
- Added two more options under Auto Choice
- New asset class for Alternative Investments for private sector subscribers
- Option to defer the purchase of annuity by 3 years
- 40% of corpus tax free on maturity
- Minimum investment lowered to Rs 1,000
- One time option to shift from EPF & Superannuation fund
We cover these changes in detail below:
1. Two more options under Auto Choice
Until now you had following two broad choices while opening NPS account: Auto Choice & allocation to asset classes on your own.
On November 4, NPS introduced 2 more options in auto choice for non-government subscribers only, making 3 auto choices options:
- Aggressive Life Cycle Fund (LC 75) – New
- Conservative Life Cycle Fund (LC 25) – New
- Moderate Life Cycle Fund (LC 50) – Existing – also default option
I. Aggressive Life Cycle Fund (LC 75)
In case of Aggressive Life Cycle Fund, the equity exposure (E) is 75% till the age of 35 years and reduces by 4% every year till the equity exposure is reduced to 15% at 55 years of age. Henceforth the equity exposure remains at 15% till the maturity.
This plan is suited for young investors who can harness the returns of equity and have enough investment time to manage the risk.
II. Conservative Life Cycle Fund (LC 25)
In this case the equity exposure is 25% till the age of 35 years and reduces by 1% every year till the equity exposure is reduced to 5% at 55 years of age. Henceforth the equity exposure remains at 5% till the maturity.
This plan is suited for subscribers who want low risk portfolio.
III. Moderate Life Cycle Fund (LC 50)
In this case the equity exposure is 50% till the age of 35 years and reduces by 2% every year till the equity exposure is reduced to 10% at 55 years of age. Henceforth the equity exposure remains at 10% till the maturity.
This was the existing auto choice is also the default choice for investors.
Impact: I personally recommend to choose your own asset distribution, so this additional option is not much relevant. However its a good move for people who choose auto investment option.
Also Read: Best Tax Saving Investments u/s 80C
2. New Alternative Investments asset class
Until now NPS allowed its subscribers to choose from following 3 asset classes:
- Equity (E) – with maximum cap of 50%
- Corporate Bonds (C)
- Government Bonds (G)
In November PFRDA has introduced a new class called Alternative Investments (A) for private sector subscribers only. The maximum limit for the asset class is 5%. The Alternative Investments would invest in the following:
- Commercial mortgage based securities or Residential mortgage based securities
- Units issued by Real Estate Investment Trusts regulated by SEBI
- Asset backed securities regulated SEBI
- Units issued by Infrastructure Investment Trusts regulated by SEBI
- Alternative Investment Funds (AIF Category I and II) registered with SEBI
Impact: This is a complicated investment avenue and is difficult to understand for layman investors. Also mere 5% investment would not make any significant difference in the returns. My recommendation stick with the earlier asset classes only.
Also Read: Tax Planning Guide for FY 2016-17
3. Option to defer the purchase of annuity by 3 years
At maturity 40% of the NPS corpus has to be used to compulsorily purchase annuity. Earlier you had to purchase the annuity at the age of 60 only. With the new rules you can defer the purchase of annuity by 3 years till the age of 63 years.
Impact: This is a good move as not everyone retires at 60. Also the annuity payout is higher if purchased at higher age. This also helps people to wait in case they feel the annuity rates are not right at the time.
4. 40% of corpus tax free on maturity
NPS is EET product which means it’s exempted from taxes at the time of investment and growth phase but you need pay taxes at the time of maturity.
Earlier rule: The 40% corpus which has to be invested in annuity is tax free. Rest 60% which was lumpsum withdrawal would be added to the annual income and taxed according to the respective tax slab.
New Rule: Budget 2016 made NPS more tax efficient. The investment in annuity is tax free and only 20% of the corpus would be taxable on lumpsum withdrawal.
Impact: Lower taxes is always good news!
5. Minimum investment lowered to Rs 1,000
The minimum annual investment in NPS has been lowered to Rs 1,000 from Rs 6,000 earlier. This is to encourage even the lower income people to come into its folds.
Impact: No impact on regular subscribers.
6. One time option to shift from EPF & Superannuation fund
Budget 2016 had proposed portability between EPF & NPS. The government has now allowed one time shift from EPF and Superannuation fund to NPS. After the switch to NPS you can still go back to EPF only once.
Though shifting from EPF to NPS is still not recommended as EPF still offers above market interest rates and is completely tax exempted. However it’s recommended to shift your Superannuation fund to NPS as NPS is more tax efficient and more flexible with purchase of annuity.