Many corporations are introducing an option to switch from their existing Superannuation scheme to the national pension scheme (NPS). Here is what you need to consider before deciding to switch.
Many wrongly think that the NPS comes with additional employer contribution tax deductions. This is incorrect. Up to Rs. 7.5 lakhs of employer contribution in a superannuation fund is tax-free. The same is also true for the NPS.
While the superannuation fund employer contribution is not added to the employee’s income, the NPS employer contributions are first added and then deducted via section 80CCD (2) of the Income Tax Act. So effectively, the tax paid is the same in both cases. Switching to the NPS will not result in anything “extra”. In any case, the decision to switch should not be based on that.
(A) A superannuation scheme is a fixed benefit scheme with a known return, whereas the NPS is a mutual fund linked to the market with defined contributions. Therefore those who do not have the capital market experience or do not have the appetite to stomach volatility should not switch from a superannuation scheme to the NPS.
(B) NPS withdrawals or annuity purchases can be delayed beyond 60 as per the retiree’s needs. See: NPS Systematic Lump sum Withdrawal Rules Explained. This is typically not possible with a superannuation scheme.
(C) Most superannuation schemes expect the subscriber the purchase an annuity for 2/3rds of the corpus. Only 1/3 can be withdrawn. While this may be ‘okay’ for those with only a little corpus to play with, it is tax-inefficient for those with a healthy nest egg.
Other considerations:
- Suppose the superannuation fund is the major investment in your retirement portfolio, and you have not been investing in equity MFs or stocks for long. In that case, you should not switch, at least not immediately.
- If your retirement is less than ten years away and the superannuation fund is significant, you should not switch.
- If you have ample corpus from other sources and your retirement is far away (10-plus years), points (B) and (C) mentioned above are the key reasons for switching to the NPS.
Therefore, look at your circumstances, your portfolio’s worth, your risk appetite to handle market risks, and your asset allocation and then decide between a superannuation fund and the NPS. Note: Even if you choose an all-bond NPS portfolio (govt bonds – option G with corporate bonds, option C), the returns and corpus growth will be significantly more volatile than the steady (real) compounding offered by a fixed return scheme. So choose NPS only if you are ready for the ride and have enough time to make the risk reasonable.
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