In order to increase the pension coverage, the pension fund regulator has increased the maximum age for joining National Pension System (NPS) to 65 years from 60 years for private sector and corporate models. As more and more people are working beyond the age of 60 because of better healthcare facilities and more work opportunities in the private sector or self-employment, the move to increase the age limit will help people save when they work and earn pension after retirement. The annuity rates at an older age are better than that at the age of 60 years. In fact, Pension Fund Regulatory and Development Authority (PFRDA) has taken a host of consumer-friendly initiatives like more choice for life cycle funds as per one’s risk appetite, appointed a second record keeping agency, and have allowed partial withdrawal for medical emergency.
From 60 to 65 years
A subscriber joining NPS after the age of 60 years would be eligible to continue in the system up to the age of 70 years. The subscriber will have the same choice of pension fund managers as well as the investment choice as is available under NPS for all subscribers. The asset allocation in the life cycle fund for a subscriber joining NPS after the age of 60 will be of three types. In the aggressive life cycle fund, the equity investment will be 15%, corporate bonds of 10% and government securities of 75%. In the moderate life cycle fund, the equity investment will be 10%, corporate bonds will be 10% and government securities of 80%. In the conservative life cycle, the equity investment will be 5%, corporate bonds of 5% and government securities of 90%.
In case of normal exit, after completing three years from the date of joining NPS, the subscriber will be required to annuitise at least 40% of the corpus for purchase of annuity and the remaining corpus can be withdrawn in lump sum. In case the accumulated corpus at the time of exit is equal or less than `2 lakh, the subscriber will have the option to withdraw the entire corpus in lump sum. Any premature exit, before completion of three years will be treated as premature exit. In such as a case, the subscriber will be required to annuitise at least 80% of the corpus for purchase of annuity and the remaining corpus can be withdrawn in lump sum. However, in case the accumulated corpus at the time of exit is equal or less than `1 lakh, the subscriber will have the option to withdraw the entire corpus in lump sum. In case of death of the subscriber, the entire corpus will be paid to the nominee of the subscriber.
Ideal for retirement needs
A pure defined contribution pension product, NPS was introduced in 2004 for government employees and, in 2009, was extended to all private sector employees. It is an ideal investment tool for retirement planning. The NPS offers two approaches to invest subscriber’s money: active choice and auto choice. In the first, an individual can decide on the asset classes in which the contributed funds are to be invested and their percentages—equity, corporate debt and government debt. In auto choice or life cycle fund, the investment of funds is done automatically based on the age profile of the subscriber, where the equity portion declines with increase in age.
Under Section 80CCD, a taxpayer can investment up to Rs 50,000 to get tax benefit, which is over and above the benefit available on `1.5 lakh under Section 80C. Also, if the employer contributes to the taxpayer’s NPS account, he gets to claim tax benefits. Contributions made by employer are allowed under Section 80CCD(2). This deduction does not have a monetary restriction, but the total deduction claimed for amount contributed by the employer should not exceed 10% of your salary. Employer can make this contribution apart from contributing to EPF. However, this will reduce one’s take-home pay, but will save on tax and create a corpus for retirement needs. One has to pay tax on 20% of the withdrawal. Products like PPF and EPF are tax-exempt at all the three stages— investment, accumulation and withdrawal. Subscribers of NPS Tier-1 account can now make tax-free partial withdrawal of up to 25% of contributions for certain specified circumstances after 10 years of being in the scheme.