The National Pension System (NPS) has been evolving rapidly since its inception in 2004. With over 40 tweaks implemented since 2018, the scheme has seen significant changes that make it an even more attractive option for tax-saving and retirement planning.
In this blog post, we’ll delve into 5 key changes done by PFRDA in NPS that have transformed the NPS into a powerhouse for building your retirement corpus:
NPS Before 2018
Before 2018, the NPS offered a different picture, one less rosy than the attractive scheme we know today. Here’s a glimpse into the limitations and disadvantages compared to the current NPS:
1. Tax Benefits:
- Less Attractive Deductions: While you still benefited from an 80C deduction on NPS contributions, the EEE (exempt-exempt-exempt) status wasn’t yet in place. This meant withdrawals at maturity were partially taxable, reducing the overall benefit.
- No Annuity Tax Exemption: The entire 40% corpus used for annuity purchase was taxable before 2019. This significantly eroded the tax-free advantage of the NPS.
2. Investment Flexibility:
- Equity Constraint: Equity allocation was capped at 50%, even for younger investors, limiting the potential for higher returns from the stock market.
- Automatic Equity Reduction: As you aged closer to retirement, your equity exposure automatically decreased, potentially hindering long-term growth.
3. Access to Funds:
- Strict Withdrawal Rules: Premature withdrawals were heavily penalized, making the scheme less flexible for unexpected financial needs.
- Limited Options: You could only choose one fund manager for all asset classes, restricting your ability to tailor your investment strategy.
4. Operational Drawbacks:
- No Same-Day NAV: Contributions took T+2 days to reflect in your account, delaying the benefit of compounding interest.
- Complexities in Setting Up SIPs: Regular contributions weren’t as streamlined as today, making it less convenient for disciplined saving.
In short, the pre-2018 NPS, while valuable, wasn’t as compelling as the present iteration. The current scheme offers significantly improved tax benefits, greater investment flexibility, easier access to funds, and user-friendly features like same-day NAV and simplified SIPs. This evolution has transformed the NPS into a truly powerful tool for building a secure and prosperous retirement.
Status of NPS After 2018: 5 Key Changes
1. Virtually Tax-Free:
One of the biggest draws of the NPS is its tax-free nature. At maturity (60 years old), you can withdraw up to 60% of your corpus tax-free. The remaining 40% must be used to purchase an annuity plan, but the payouts from this annuity are also tax-free. This effectively makes the NPS a 100% tax-free investment option, a significant improvement from the earlier scenario where 20% of the corpus withdrawal was taxable.
2. Higher Equity Exposure:
The NPS allows you to choose your equity and debt allocation through the “Active Choice” feature. Previously, your equity allocation would automatically decrease as you approached retirement, reaching 50% by the age of 60. However, the NPS now allows you to maintain a 75% equity allocation until your retirement, potentially boosting your returns by letting you enjoy equity market growth on a larger portion of your investment.
Also Read: The complete guide to Annuity plans for NPS
3. Systematic Withdrawal in NPS:
Similar to mutual fund SWPs, the NPS introduced the Systematic Withdrawal option (SLW) in October 2023. This feature allows you to withdraw a portion of your corpus (60%) systematically between the ages of 60 and 75, while still investing the remaining 40% in an annuity plan. This provides a regular income stream during your retirement years while your corpus continues to grow within the NPS.
4. Same-Day NAV:
The D-Remit facility, launched in October 2020, allows you to receive the same-day NAV (Net Asset Value) on your NPS contributions if you invest before 9:30 AM. This eliminates the T+2 day settlement period, making your investments work for you faster. Additionally, D-Remit facilitates setting up NPS SIPs for regular and disciplined contributions.
5. Different Fund Managers for Different Asset Classes:
Another recent development is the ability to choose different fund managers for each of the four asset classes offered by the NPS: equity, government bonds, corporate bonds, and AIFs. Previously, you could only choose one fund manager for all asset classes. This new flexibility allows you to tailor your investment strategy by selecting fund managers who excel in specific asset classes.
The NPS has undergone significant transformations in recent years, making it a highly compelling option for retirement planning. With its virtual tax-free nature, increased equity exposure options, systematic withdrawal flexibility, same-day NAV facility, and diversified fund manager choices, the NPS offers a powerful tool for building a secure and prosperous retirement.
Investing in the NPS can be made even easier through platforms like ET Money, which simplifies the process and allows you to set up NPS SIPs with ease. So, why wait? Start exploring the NPS today and unlock the potential for a financially secure future.
- Remember that the NPS has a lock-in period until retirement (age 60). However, partial withdrawals are allowed for specific purposes like child’s higher education or marriage.
- Carefully consider your risk appetite and investment horizon when choosing your asset allocation within the NPS.
- Seek professional financial advice if you need help navigating the NPS and other retirement planning options.
By understanding the recent changes and benefits of the NPS, you can make informed decisions about your retirement savings and secure a comfortable future for yourself.
Disclaimer: This blog post is for informational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any investment decisions.