Joining a corporate NPS plan makes sense for those with surplus money

However, given the low liquidity, invest an amount you will not need before 60

Employees of many companies would have received letters from their human resource department recently saying that they have the option to contribute to the National Pension System (NPS) in the form of employer’s contribution. The option will be available in addition to the Employees’ Provident Fund (EPF) contribution. 

The major benefit of opting for a corporate NPS plan is the additional tax benefit you can avail. Contributions made by the employer are eligible for deduction under Section 80CCD (2). “The maximum amount eligible for deduction will be the lower of the following: Actual contribution by employer, or 10 per cent of basic plus dearness allowance,” says Archit Gupta, founder and CEO, ClearTax. There is no limit in rupee terms on the deduction under this section. 

Tax benefit is also available on your contribution to NPS under Section 80CCD (1). But this falls under the overall limit of Rs 1.5 lakh available under Section 80C, and hence may not be very useful if you have exhausted it with other instruments. A third benefit is available under Section 80CCD (1B), a deduction of up to Rs 50,000 offered exclusively for your contribution to NPS.  

Joining the corporate NPS plan makes sense for those with surplus money. “Someone who falls in the higher tax bracket can save a considerable amount in tax by going for this option,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor. 

NPS offers a few other benefits as well. “Wealth in an NPS account accumulates till retirement, benefiting from compounding effect. Low account maintenance and fund management charges help create a large corpus over the long term,” says Saurav Basu, head-wealth management, Tata Capital Financial Services.  

However, contributing to this scheme will mean less salary in hand. Participate only if doing so will not cause a liquidity crunch. Moreover, NPS is meant to help you create a retirement corpus. Premature withdrawal is difficult, hence opt only if you will not need the money before 60. “Although early withdrawal is possible, 80 per cent of the corpus has to be compulsorily put in an annuity, and only 20 per cent is given as lump sum,” says Basu.  

The rules regarding partial withdrawal are also strict. “Such withdrawal is permitted only after 10 years and is limited to 25 per cent of the employee’s contribution. Access to either the employer's contribution, or to the appreciation component is not permitted,” says Raghaw. Such a withdrawal is permitted only for specific purposes, like critical ailments, child's education or marriage, and house purchase. Investing in corporate NPS should not lead to crowding out of your other investments. 

Many employees wonder whether they will be better off joining corporate NPS or enhancing their contribution to EPF, via the Voluntary Provident Fund (VPF) route. Public Provident Fund (PPF) is another popular option. 

When making this choice, take into account your asset allocation. NPS is a hybrid (maximum equity exposure allowed is 75 per cent) product that will boost the equity allocation of your portfolio. It also has the potential to offer high returns over the long term (see table). EPF/VPF and PPF are primarily debt products. Check your current asset allocation to see whether your portfolio needs an additional dose of equity or debt. NPS will offer you additional tax benefits. But bear in mind the low liquidity in this product. 

EPF/VPF and PPF are attractive debt products offering returns of 8.55 per cent and 8 per cent respectively. Both enjoy EEE (exempt-exempt-exempt) tax treatment. You get the entire corpus on maturity and there is no compulsion to buy an annuity. In NPS 60 per cent of the corpus is given to you as lump sum and is exempt from tax. You have to buy an annuity with 40 per cent. Income from an annuity is added to your income and taxed.

Those having a private NPS account can port to corporate NPS by filling up a form.