Mrin Agarwal Financial educator, founder director of Finsafe India Pvt. Ltd & co-founder of Womantra.
Credit: DH Illustration.
Earlier this month, Pension Fund Regulatory and Development Authority (PFRDA) introduced new rules for individuals withdrawing from their National Pension Scheme (NPS). Let us understand what it offers and how it can help better plan your retirement kitty.
Retirement is wonderful if you have two essentials. – much to live on and much to live for! While recent surveys show encouraging trends with more people planning for retirement, the fact remains that investments for the retirement corpus are tilted in favour of fixed income investments and annuities, which do not really beat inflation. Thus, resulting in a deficit in the first retirement essential – much to live on.
To have enough retirement corpus, individuals have to take higher equity exposure. While equity exposure can be added through stocks and mutual funds, most investors find it very difficult to figure out which stock/fund to invest into and then to remain invested till retirement. A better alternative is the national pension scheme (NPS), which is locked in till age 60 and the only decision the investor needs to take is the allocation between equity and debt and the pension fund manager. Given that most other retirement investments are in debt instruments, the active equity option is recommended.
The NPS corpus can be withdrawn at 60 years, with 40 per cent going into an annuity and 60 per cent being allowed to be withdrawn as a tax-free lump sum. Subscribers would further deploy the lump sum as per their requirements. Interest on most of the regular return options like fixed deposits, senior citizen savings scheme, Post office Monthly income scheme etc. is taxed at slab. There were 2 issues here – figuring out how to redeploy the corpus and taxability of returns.
Both of these pain points have been resolved with the recently amended withdrawal rules on NPS. As per the proposed rule, subscribers can withdraw the 60 per cent corpus through a systematic lump sum withdrawal plan (SLW) on a monthly, quarterly, half-yearly, or annual basis for a period of up to 75 years of age, as chosen at the time of retirement. The withdrawals will be tax free and the remaining corpus will continue to earn returns, which will also be tax free.
The new rules make NPS the best retirement scheme in India. Most people do not take formal financial advice and invest in an ad hoc manner for retirement. The NPS allows investors to invest, into equity, without having to worry about what to buy or when to rebalance. The lock-in ensures no churning, thus letting investments compound. Post retirement, subscribers get regular returns through the annuity portion, which can be augmented with the SLW to the extent required, while the remaining portion continues to earn tax free market linked returns. No need to fret about redeployment or taxes. All in all making pre and post retirement planning hassle free.