ETMarkets.com"There are 10 odd pension fund managers that offer to manage your pension funds or your NPS corpus for you. These are privately owned entities that manage it for you. Now, within this, you have the option to craft and construct your own asset allocation. You can choose between asset classes of equity, corporate bonds, government securities and very recently trending, alternative security. You can choose a combination of these asset classes and build your own sort of a product," customised to your needs, says Nirav Karkera, Head-Research, Fisdom
Further, Karkera says that NPS is probably the only investment product that offers an additional deduction of Rs 50,000 over and above the 1.5 lakh deduction offered by Section 80C.
NPS as we all know, gets in vogue just before March 31 because people realise it is one of the best investment instruments not only to park in their money for retirement but also tax saving which is a very huge benefit. How can one make use of an investment option like NPS to save the maximum amount of tax?
When it comes to tax savings, NPS is a widely known product but not often discussed. NPS is in fact one of the most efficient products out there. It ranks along with the other efficient products that help you extract the maximum tax benefit while using the product to generate wealth.
Coming to NPS, if you want to extract the most out of it while you can use it as a deduction under your standard limits under section 80C, that is the Rs 1.5 lakh limit, NPS is probably the only investment product that offers an additional deduction of Rs 50,000 over and above the 1.5 lakh deduction offered by Section 80C.
If you have been utilising Section 80C through a variety of other products, you can always add in or top up another investment of up to Rs 50,000 into NPS. If there is any gap, you can still invest into NPS and cover that gap in Section 80C and ensure that you are utilising the Rs 1.5 lakh plus 50,000 that is the total of Rs 2,00,000 as a deduction. While you can do all of it in NPS, it always makes sense to prioritise the other ones that qualify and exhaust as much as possible in 80C and then fill the remainder through NPS. It really helps you fill those gaps.
Now, let us go to the second step. Assuming one has marked down to NPS as one of their tax saving investment instruments to be done this time, how can we select the schemes?
There are a variety of schemes, I will get to that but firstly, there are 10 odd asset managers or pension fund managers that offer to manage your pension funds or your NPS corpus for you. These are privately owned entities that manage it for you. Now, within this, you have the option to craft and construct your own asset allocation. You can choose between asset classes of equity, corporate bonds, government securities and very recently trending, alternative security. You can choose a combination of these asset classes and build your own sort of a product, customised to your need and any of these combinations will be managed by the asset management company that I spoke about earlier.
This flexibility helps you tailor your NPS investments in line with your primary asset allocation or allocation strategy at a higher level also. Most other products are either skewed towards equity in entirety or a fixed income sort of a construct in entirety, but the beauty about NPS is there is a lot of fungibility in choosing the asset allocation.
Let us say you are a conservative investor with a fairly decent time horizon. You do not want to undergo the volatility that equity brings in or at least you want to keep it to the minimal. It makes sense to increase your exposure towards government securities, which are relatively less volatile, followed by corporate bonds and then have a minimal allocation towards equities, at an overall level this will reduce your portfolios or investments volatility.
On the other side of the spectrum, if you are a really aggressive investor, you might want to go up to the maximum possible limit of let us say 75% into equities and split the rest into corporate and government securities that way and for investors who are not very sure. They can choose the option that NPS offers wherein they can choose an auto selection model, wherein depending on the risk appetite, the model will allocate into those asset classes and dynamically manage those asset classes as you progress through time.
There are three primary categories like conservative, moderate and aggressive. It auto selects the asset classes so that it takes the burden of selection and asset allocation off your mind, if you are not really chasing any particular or specific target allocation. So, these are the schemes that are there and while selecting, I feel the first step begins with deciding your asset allocation, what is it that you are chasing and then choosing the asset managers that you believe will be the right fit.
Looking at the scheme performances, how have these fund managers performed or fared in the last three years?
I will talk a little bit more from a three-year standpoint which will give a whole lot more visibility….
Three years is a better time frame in case one has a complete equity scheme.
In case you have a complete equity scheme and look at it from a three years’ standpoint, you will see that most funds on a three-year CAGR basis have performed exceptionally well because the markets rebounded.
But specific funds like a Kotak Mahindra Pension Fund or an ICICI Prudential Pension Fund or an HDFC Pension Fund performed really well and would have delivered on an average 20 odd percentage CAGR, which is very good. I would say it is exceptional, but also an outlier case that does not imply that the next three years are going to be as good. But this is the range in which these very good equity pension fund managers have been performing for an equity specific portfolio.
If you want to analyse the portfolio allocation of these fund managers, for equity schemes what kind of portfolio allocation or exposure do they have?
Most of these funds tend to have a largecap orientation as we speak but that is not because of the mandate restricting them as much but because they have decided to build a largecap oriented portfolio and it makes a whole lot of sense at this point in time the way the markets are. So they have a large cap oriented portfolio and a well diversified portfolio. Most of them have been limiting sectoral exposure and so the sectoral spread and most of these portfolios are pretty well diversified.
We have two types of choices: active and auto. How many times can we change our pension fund manager in a year?
In a year you can change your pension fund manager only once but you can change the scheme twice. You can change your allocation four times but pension fund manager only once.
Let us talk about the kind of accounts which are offered which is tier-1 and tier-2. What is the importance of each of these accounts?
So tier-1 and tier-2 are both part of the NPS schemes but to open a tier-2 account, you must mandatorily have a tier-1 account. The tier-1 account is basically the NPS account with the lock-in which has all the tax benefits. You can claim tax deductions. You need to convert it to annuity and then you get that exemption. You gain an exemption on a lumpsum withdrawal of up to 60%, all of these tax breaks, tax exemptions plus tax deductions are applicable to only tier-1 investments.
Tier-2 investments are voluntary. They do not really have a lock-in. You can use it as a substitute for almost any other packaged basket of securities like for instance the closest parallel would be with a mutual fund. It is a voluntary investment product, you can decide your asset allocation, the only difference is you would not be getting these tax breaks, there is not going to be any lock-ins. Probably the only guys who benefit from a tax standpoint here are central government employees who can avail tax deductions on the investment into tier-2.
How can private and public sector employees invest in NPS? Are there different rules categorised for them? Can NRIs invest in NPS?
Both government and private sector employees can invest in NPS. The distinction happens when it comes to claiming deductions on investments made into the tier-2 of NPS, wherein central government employees are allowed to claim a deduction.
Apart from that, the process remains largely the same for both central government or private sector employees. There is a slight tweak when it comes to claiming tax deductions for self-employed people where it can go only up to 20% of gross income, wherein in case of employees, it can go up to 10% of basic plus PF. That is the slight nuanced difference between self employed and employees.
NRIs can invest in NPS schemes. Aany NRI who is between 18 and 70 years of age and has complied with all relevant FEMA and RBI regulations and all existing KYC norms which basically entails that they have a valid Aadhaar Card, PAN number, PAN verified bank account can also invest in NPS schemes.
What is the age criteria for investment?
Between 18 to 70.
18 to 70 years you can have your investments and the lock-in is till 60?
Yes.
So after 60 you can either withdraw or you can stay invested. What is the withdrawal procedure?
You can either withdraw or stay invested but if you do not withdraw at 60, it auto renews up to the age of 75 and you will have to redeem after 75. The process is fairly straightforward. Today everything is online and it is very convenient. You just log into the NPS website and place redemption requests and because of the rules, you will land up redeeming 60% in lumpsum in a normal situation and converting the rest 40% into an annuity product.
You can choose any annuity service provider of choice and that is how you can get your money and ensure that your annuity comes in post maturity.
It will be taxed if I am not wrong?
Yes, the income from annuity will be taxed.
Talking about the mood of investment, what is the minimum amount one can actually put in? What is the criteria if at all there is one?
There is no criteria per se, I would say it is slightly different for tier-1 and tier-2. In tier-1, you must make at least one investment during the year to keep the account active; tier-2 does not entail any such mandatory investments.
What is the minimum amount of investments in tier-1?
In tier-1 it would be Rs 500 and for tier-2 Rs 1,000.
Can we do an SIP?
Yes, you can.
NPS as a retirement tool is great if one really understands and has a place in their portfolio to put it in. Can this be the only investment instrument for retirement?
Nirav Karkera: Probably not like with any other instrument No instrument in itself is sufficient to plan for retirement and there are a variety of others and although this is a pretty good starting point for investors who are very new to various asset classes, you can start with NPS because the tax break that it gives you. But eventually, you may have to start looking beyond NPS and probably the very next logical natural progression would be in the line of mutual funds and then progress as your understanding and your requirements become more and more unique. There are a variety of products that you can explore.
What are the partial withdrawal rules?
You can partially withdraw it after completing three years. You can withdraw up to 25% of your contributions but that would be only in the case of specific notified events, for example, an illness, disability, your children’s marriage, purchasing a property and so on and so forth. There is a prescribed list of things for which you could apply and partially withdraw.
You can do this only up to three times during your entire tenure of holding NPS. You can withdraw partially after completion of three years but it can be only up to 25% and under such circumstances, 25% of your own contribution, not the entire corpus.
Further, Karkera says that NPS is probably the only investment product that offers an additional deduction of Rs 50,000 over and above the 1.5 lakh deduction offered by Section 80C.
NPS as we all know, gets in vogue just before March 31 because people realise it is one of the best investment instruments not only to park in their money for retirement but also tax saving which is a very huge benefit. How can one make use of an investment option like NPS to save the maximum amount of tax?
When it comes to tax savings, NPS is a widely known product but not often discussed. NPS is in fact one of the most efficient products out there. It ranks along with the other efficient products that help you extract the maximum tax benefit while using the product to generate wealth.
Coming to NPS, if you want to extract the most out of it while you can use it as a deduction under your standard limits under section 80C, that is the Rs 1.5 lakh limit, NPS is probably the only investment product that offers an additional deduction of Rs 50,000 over and above the 1.5 lakh deduction offered by Section 80C.
If you have been utilising Section 80C through a variety of other products, you can always add in or top up another investment of up to Rs 50,000 into NPS. If there is any gap, you can still invest into NPS and cover that gap in Section 80C and ensure that you are utilising the Rs 1.5 lakh plus 50,000 that is the total of Rs 2,00,000 as a deduction. While you can do all of it in NPS, it always makes sense to prioritise the other ones that qualify and exhaust as much as possible in 80C and then fill the remainder through NPS. It really helps you fill those gaps.
Now, let us go to the second step. Assuming one has marked down to NPS as one of their tax saving investment instruments to be done this time, how can we select the schemes?
There are a variety of schemes, I will get to that but firstly, there are 10 odd asset managers or pension fund managers that offer to manage your pension funds or your NPS corpus for you. These are privately owned entities that manage it for you. Now, within this, you have the option to craft and construct your own asset allocation. You can choose between asset classes of equity, corporate bonds, government securities and very recently trending, alternative security. You can choose a combination of these asset classes and build your own sort of a product, customised to your need and any of these combinations will be managed by the asset management company that I spoke about earlier.
This flexibility helps you tailor your NPS investments in line with your primary asset allocation or allocation strategy at a higher level also. Most other products are either skewed towards equity in entirety or a fixed income sort of a construct in entirety, but the beauty about NPS is there is a lot of fungibility in choosing the asset allocation.
Let us say you are a conservative investor with a fairly decent time horizon. You do not want to undergo the volatility that equity brings in or at least you want to keep it to the minimal. It makes sense to increase your exposure towards government securities, which are relatively less volatile, followed by corporate bonds and then have a minimal allocation towards equities, at an overall level this will reduce your portfolios or investments volatility.
On the other side of the spectrum, if you are a really aggressive investor, you might want to go up to the maximum possible limit of let us say 75% into equities and split the rest into corporate and government securities that way and for investors who are not very sure. They can choose the option that NPS offers wherein they can choose an auto selection model, wherein depending on the risk appetite, the model will allocate into those asset classes and dynamically manage those asset classes as you progress through time.
There are three primary categories like conservative, moderate and aggressive. It auto selects the asset classes so that it takes the burden of selection and asset allocation off your mind, if you are not really chasing any particular or specific target allocation. So, these are the schemes that are there and while selecting, I feel the first step begins with deciding your asset allocation, what is it that you are chasing and then choosing the asset managers that you believe will be the right fit.
Looking at the scheme performances, how have these fund managers performed or fared in the last three years?
I will talk a little bit more from a three-year standpoint which will give a whole lot more visibility….
Three years is a better time frame in case one has a complete equity scheme.
In case you have a complete equity scheme and look at it from a three years’ standpoint, you will see that most funds on a three-year CAGR basis have performed exceptionally well because the markets rebounded.
But specific funds like a Kotak Mahindra Pension Fund or an ICICI Prudential Pension Fund or an HDFC Pension Fund performed really well and would have delivered on an average 20 odd percentage CAGR, which is very good. I would say it is exceptional, but also an outlier case that does not imply that the next three years are going to be as good. But this is the range in which these very good equity pension fund managers have been performing for an equity specific portfolio.
If you want to analyse the portfolio allocation of these fund managers, for equity schemes what kind of portfolio allocation or exposure do they have?
Most of these funds tend to have a largecap orientation as we speak but that is not because of the mandate restricting them as much but because they have decided to build a largecap oriented portfolio and it makes a whole lot of sense at this point in time the way the markets are. So they have a large cap oriented portfolio and a well diversified portfolio. Most of them have been limiting sectoral exposure and so the sectoral spread and most of these portfolios are pretty well diversified.
We have two types of choices: active and auto. How many times can we change our pension fund manager in a year?
In a year you can change your pension fund manager only once but you can change the scheme twice. You can change your allocation four times but pension fund manager only once.
Let us talk about the kind of accounts which are offered which is tier-1 and tier-2. What is the importance of each of these accounts?
So tier-1 and tier-2 are both part of the NPS schemes but to open a tier-2 account, you must mandatorily have a tier-1 account. The tier-1 account is basically the NPS account with the lock-in which has all the tax benefits. You can claim tax deductions. You need to convert it to annuity and then you get that exemption. You gain an exemption on a lumpsum withdrawal of up to 60%, all of these tax breaks, tax exemptions plus tax deductions are applicable to only tier-1 investments.
Tier-2 investments are voluntary. They do not really have a lock-in. You can use it as a substitute for almost any other packaged basket of securities like for instance the closest parallel would be with a mutual fund. It is a voluntary investment product, you can decide your asset allocation, the only difference is you would not be getting these tax breaks, there is not going to be any lock-ins. Probably the only guys who benefit from a tax standpoint here are central government employees who can avail tax deductions on the investment into tier-2.
How can private and public sector employees invest in NPS? Are there different rules categorised for them? Can NRIs invest in NPS?
Both government and private sector employees can invest in NPS. The distinction happens when it comes to claiming deductions on investments made into the tier-2 of NPS, wherein central government employees are allowed to claim a deduction.
Apart from that, the process remains largely the same for both central government or private sector employees. There is a slight tweak when it comes to claiming tax deductions for self-employed people where it can go only up to 20% of gross income, wherein in case of employees, it can go up to 10% of basic plus PF. That is the slight nuanced difference between self employed and employees.
NRIs can invest in NPS schemes. Aany NRI who is between 18 and 70 years of age and has complied with all relevant FEMA and RBI regulations and all existing KYC norms which basically entails that they have a valid Aadhaar Card, PAN number, PAN verified bank account can also invest in NPS schemes.
What is the age criteria for investment?
Between 18 to 70.
18 to 70 years you can have your investments and the lock-in is till 60?
Yes.
So after 60 you can either withdraw or you can stay invested. What is the withdrawal procedure?
You can either withdraw or stay invested but if you do not withdraw at 60, it auto renews up to the age of 75 and you will have to redeem after 75. The process is fairly straightforward. Today everything is online and it is very convenient. You just log into the NPS website and place redemption requests and because of the rules, you will land up redeeming 60% in lumpsum in a normal situation and converting the rest 40% into an annuity product.
You can choose any annuity service provider of choice and that is how you can get your money and ensure that your annuity comes in post maturity.
It will be taxed if I am not wrong?
Yes, the income from annuity will be taxed.
Talking about the mood of investment, what is the minimum amount one can actually put in? What is the criteria if at all there is one?
There is no criteria per se, I would say it is slightly different for tier-1 and tier-2. In tier-1, you must make at least one investment during the year to keep the account active; tier-2 does not entail any such mandatory investments.
What is the minimum amount of investments in tier-1?
In tier-1 it would be Rs 500 and for tier-2 Rs 1,000.
Can we do an SIP?
Yes, you can.
NPS as a retirement tool is great if one really understands and has a place in their portfolio to put it in. Can this be the only investment instrument for retirement?
Nirav Karkera: Probably not like with any other instrument No instrument in itself is sufficient to plan for retirement and there are a variety of others and although this is a pretty good starting point for investors who are very new to various asset classes, you can start with NPS because the tax break that it gives you. But eventually, you may have to start looking beyond NPS and probably the very next logical natural progression would be in the line of mutual funds and then progress as your understanding and your requirements become more and more unique. There are a variety of products that you can explore.
What are the partial withdrawal rules?
You can partially withdraw it after completing three years. You can withdraw up to 25% of your contributions but that would be only in the case of specific notified events, for example, an illness, disability, your children’s marriage, purchasing a property and so on and so forth. There is a prescribed list of things for which you could apply and partially withdraw.
You can do this only up to three times during your entire tenure of holding NPS. You can withdraw partially after completion of three years but it can be only up to 25% and under such circumstances, 25% of your own contribution, not the entire corpus.
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