Why easing the entry age for NPS investment makes sense

NPS returns have been better than those of Employee Provident Funds, and on average, far more stable than those of mutual funds that chase high returns, often successfully, but often with indifferent or even capital-disastrous results. with. Nor is it just a matter of better returns. NPS offers some advantages over traditional small savings options and EPF.

You put money in a public provident fund or a post office savings scheme, the returns are a few basis points higher than in a 10-year government bond, and the money remains out of reach for a few years. In EPF, apart from facing similar restrictions on withdrawals, individual savers have no say in how the funds will be deployed, and returns are decided by an extremely conservative committee of trustees, and notified by the government. In NPS, the return is based on the return on the investment made.

An NPS subscriber can choose from five fund managers, subject to the cap on how much to allocate to equities, corporate bonds and government bonds, and now, alternative investment funds. The asset management charges for NPS funds are among the lowest in the world. After several upward corrections, they are capped at 0.09%. Compare this with the normal AMC of 2% for mutual funds.

NPS provides flexibility to the savers on liquidity. A subscriber can open a Tier 2 account, in which the contribution will be managed as per the risk appetite chosen by the saver and without any lock-in period.

Originally, NPS membership was open only till the age of 60 years. It was revised to 65 and now, it has become 70. As India ages, people want to work longer, earn more, save more and depend on it. Returns on their savings for their non-working years after retirement. Raising the age of entry in NPS to 70 makes it possible.

Also, those who have retired and have been keeping their money in traditional savings options like bank deposits, mutual funds and equities, now have the option of switching their savings to a relatively safe, flexible platform that offers better returns Will allow anything else. The degree of asset diversification and the fund manager of your choice – all at very low cost.

The only drawback of NPS is the tax treatment given to it. Preferential tax treatment is available as compared to EPF. Contribution to EPF is, to a certain extent, exempt from tax, accumulation of corpus with returns and fresh contributions are exempt from tax and the corpus from which you withdraw is also tax-free. In tax jargon, this is exempt-exempt-exempt in all three stages. In contrast, the tax treatment available to NPS is EET. But the entire exit corpus is not taxed. You can withdraw 60% of the corpus without any tax, but the remaining 40% will have to be taxed till you invest that money in an annuity.

The tax treatment of NPS was fixed at a time when it was expected that all savings would go to the tax regime of EET. Politicians did not have the courage to make this tax system universal for all savings. So, we have a disparity between EPF and NPS.

The government should not leave rational tax regime as the end goal. As an interim step towards ending tax discrimination against NPS, the government may give flexibility to the saver to make 40% of the exit corpus liable to tax, as long as the investment is not made in the manner prescribed by the government. How to put %: This can happen in any long. -Term capital assets that generate annual returns, such as real estate, perpetual bonds or long-term government bonds.