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Should senior citizens invest in NPS after the revised rules?

Revisions made in NPS guidelines have been made to make this pension investment instrument more appealing to the existing subscribers and senior citizens who have attained superannuation.

Written by Adhil Shetty |
Updated: September 9, 2021 11:52:33 am
nps, national pension scheme, nps new guidelinesOn the tax-saving front, investment in NPS is highly effective as contributions made by account holders are eligible for tax benefits under Section 80C and Section 80CCD of the I-T Act. (Representative image: Pixabay)

The Pension Fund Regulatory and Development Authority (PFRDA) recently revised the entry and exit guidelines to ease investment in the National Pension Scheme (NPS) for senior citizens. As per the new rules, the entry age for NPS has been revised to 18-70 years from the earlier 18-65 years. This means that you can join NPS even if you are 70 years of age. But how much will it help you as a senior citizen? Let us understand.

What is NPS?

The National Pension Scheme or NPS is a long-term retirement investment plan, voluntary in nature, and provides a social security cover in the form of a monthly pension to workers post their retirement. An individual with a minimum age of 18 can open an NPS account and needs to continue with his contribution till retirement to avail of a monthly pension. Post-retirement, the account holder can withdraw 60 per cent of the corpus tax-free. However, the remaining 40 per cent is required to mandatorily purchase an annuity from PFRDA-registered insurance firms to get a monthly pension post-retirement.

What are the recently revised guidelines of NPS?

Before the new rules, any Indian citizen (both resident and non-resident) in the age group of 18-65 years can join NPS. The revised rules have increased the entry age. Take a look:

Extension of Entry age: In its revised guidelines, PFRDA has increased the entry age up to 70 years against 65 years earlier. Therefore, as per the revision, the existing age of entry which is 18-65 years has been revised to 18-70 years. Those subscribers who have closed their NPS accounts are permitted to open new NPS accounts as per the increased age eligibility norms.

Equity Exposure capped at 50 per cent: NPS allows funds to invest in equity assets as well, but with a cap. There are two options given to subscribers (investors) — Auto Choice and Active Choice. Choosing Auto Choice by default restricts allocation to equity at 15 per cent while in Active Choice, one can decide upon allocation depending on the cap – which is generally 50 per cent to 75 per cent. It is capped at 50 per cent for government employees. The subscriber, joining NPS beyond the age of 65 years, can exercise the choice of pension fund (PF) and asset allocation with the maximum equity exposure of 15 per cent and 50 per cent under Auto and Active Choice, respectively, according to PFRDA. The PF can be changed once a year while the asset allocation can be changed twice.

Normal Exit: Further, the normal exit for such subscribers will be after three years. However, as the rule suggests the account holder who joined NPS after 65 years of age will be required to utilise at least 40 per cent of the corpus or purchase of annuity while the rest can be withdrawn as a lump sum. But, if the corpus is Rs 5 lakh or less, the account holder may opt to withdraw the entire accumulated pension wealth.

Premature Exit: In case of premature exit that is before 3 years, the subscriber will have to utilise at least 80 per cent of the corpus for purchase of annuity and the balance amount can be withdrawn in a lump sum. However, if the corpus is Rs 2.5 lakh or less, the account holder will be eligible to withdraw the entire accumulated pension wealth.

In the event of the account holder’s demise, the entire corpus will be paid to the nominee as a lump sum.

What is an annuity in NPS?

Buying an annuity is mandatory post-retirement by using 40 per cent of the corpus at the time of retirement for receiving a monthly pension. Simply put, an annuity is an insurance contract that offers a fixed income stream for a person’s lifetime. Under the NPS, a certain sum is required to buy the annuity plan for a pension from PFRDA-registered insurance firms. Annuities work by converting a lump sum amount into a fixed flow of income.

Should senior citizens invest in NPS after the revised guidelines?

Revisions made in NPS guidelines have been made to make this pension investment instrument more appealing to the existing subscribers and senior citizens who have attained superannuation. This also allows them to invest in equities for a longer time and earn better returns than traditional instruments such as fixed deposits.

That being said, senior citizens should invest in instruments that provide them assured returns and easy liquidity. NPS comes with a lock-in during, and after the investment period as well when you have to invest mandatorily in annuities. So for senior citizens liquidity may be an issue because of the lock-in terms.

Secondly, the returns on NPS are not guaranteed unlike many other instruments meant for senior citizens such as SCSS or PMVVY that offer guaranteed returns.

Thirdly, investing in NPS by senior citizens may not be as beneficial compared to a young investor whose money will have a longer duration of investment to get better returns on. Considering the age of a senior citizen, they will have very little time to remain invested to get higher returns. On the contrary, their returns may be harmed by market volatility during a short investment tenure. Also, the compulsory annuity purchase clause takes away senior citizen’s hold on their entire corpus, which may not be the case with other instruments.

Finally

On the tax-saving front, investment in NPS is highly effective as contributions made by account holders are eligible for tax benefits under Section 80C and Section 80CCD of the I-T Act. You can claim a deduction of up to Rs 1.5 lakh for your contribution as well as for the contribution of the employer under Section 80C. Additionally, you can claim a deduction for a self-contribution of up to Rs 50,000 under Section 80CCD of the I-T Act. Therefore, investing in NPS can help you claim a tax deduction of up to Rs 2 lakh in total.

But for senior citizens, tax-saving has limited benefits and should not be the main criterion for investment unless they believe they have a long working life ahead of them, which would allow them to remain invested and earn better market-linked returns.

The best idea would be to diversify your investments to minimise risks and secure an optimal and steady return from your investments.

The author is the CEO at BankBazaar.com. Views expressed are that of the author.

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