Make most of rupee-cost-averaging in NPS as well, with introduction of SIP

While this will help investors become more disciplined in saving for their retirement, the transaction charge could be a concern for those investing small amounts

The Pension Fund Regulatory and Development Authority (PFRDA) has made two important announcements related to the National Pension System (NPS). One, investors will soon be able to take the systematic investment plan (SIP) route while investing in NPS. Second, those who have made a premature exit from NPS, but have only withdrawn the lump-sum portion, will be allowed to continue with the same NPS account, provided they re-deposit the withdrawn amount.

Experts view the introduction of SIP mode as a positive development. “Even in NPS, you can invest up to 75 per cent in equities. The SIP mode will allow investors to average out their cost of purchase of units,” says Sumit Shukla, chief executive officer, HDFC Pension Fund Management.

In corporate NPS, money anyway gets deducted from an employee’s salary every month. “Corporate employees who wish to invest the additional Rs 50,000 on which tax deduction is available under Section 80CCD(1B) can do so using the SIP mode. They can make this investment via the online investment facility being provided by the central recordkeeping agency (CRA). Introduction of the SIP mode will also benefit the self-employed and those who are part of the unorganised sector.” Adds Raghvendra Nath, managing director, Ladderup Wealth Management: “Unorganised sector workers will be able to save for retirement in a more disciplined way through the SIP mode.”

Investors will, however, have to bear in mind that a transaction charge is involved each time a person invests in NPS (depending on the route taken). “If each SIP installment is small, then the transaction charge as a percentage of the invested amount could pinch,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor. If a person has invested through a point of purchase (PoP), the charge is 0.25 per cent of the invested amount, the minimum being Rs 25. A person who joined NPS through a PoP can shift to e-NPS. In that case, there will still be a transaction charge but it will be lower—0.05 per cent of the contributed amount, subject to a minimum of Rs 5. Those who invest via the e-NPS route pay no transaction charge.

On September 23, PFRDA came out with a circular pertaining to people who have made premature withdrawals from NPS. Many of them would have withdrawn the lump-sum part (20 per cent of corpus) while the remaining 80 per cent—the portion that has to be compulsorily annuitised—may still be lying in their NPS account. Withdrawal of this portion can be deferred by three years.

Many such people belong to working age and don’t need regular pay-outs from an annuity. Some may feel they made the wrong decision by exiting prematurely. Yet others may miss the tax benefits that NPS provides.

Earlier, they would have to compulsorily buy annuities with 80 per cent of their corpus, and then start a new NPS account if they wished to do so. Now, PFRDA has allowed such people to deposit the lump-sum amount back and continue with their existing NPS account. “Retirement saving is one of the most important elements of financial planning. As it is, the self-employed and those in the unorganised sector are not part of a mandatory retirement saving plan. They should take advantage of this provision and revive their NPS account,” says Nath.               

Clarity is awaited on one aspect. “When people exit prematurely from NPS and withdraw 20 per cent of the corpus as lump-sum, no tax is charged on that amount. Now when they put the money back, the earlier withdrawal can no longer be treated as an exit. There could be some tax implication. We will have to await clarity on this,” says Raghaw.

Essential things to know about exiting NPS

• In case of government employees, exit from NPS happens not at a specific age but at the time of retirement from their jobs (this age can vary quite widely these days)
• Those who open an account under the corporate model (private-sector companies) or under the all-citizens model (self-employed) can exit at age 60
• Beyond 60 you can continue with NPS till the age of 70
• An exit at 60 or above is not treated as premature
• In such an exit, at least 40 per cent of the corpus must be used to buy an annuity while up to 60 per cent can be withdrawn as lump-sum
• 60 per cent of the corpus is exempt from tax. So, any amount withdrawn as lump-sum will be tax free
• The 80:20 rule applies in case of premature exits
• The annuity portion also does not get taxed at exit. But income from annuity gets added to the pensioner’s income and is taxed at his slab rate
• When you exit after 60, you can take your money in up to 10 annual instalments (useful for those who wish to withdraw gradually)
• Somebody aged 63 can withdraw in seven instalments, someone aged 65 can withdraw in five instalments, and so on