Do you invest in NPS?
I have seen quite extreme opinions about NPS on social media. Mostly negative.
While NPS has its share of problems, I have never agreed completely with very strong negative opinions on NPS. I have found most such opinions either ill-informed or simply biased.
Like every investment product, NPS has its pros and cons. And I am sure there are several investors who find a lot of merit in NPS.
While I will leave the decision to invest in NPS to you, I thought of writing about two recent changes in tax rules that may affect your decision to invest in NPS.
As the facts change, your opinion of an investment product can also change. Have these two recent tax changes increased or decreased the attractiveness of NPS?
Let’s find out.
#1 Incentives under the New Tax Regime
Many of us invested in NPS purely to save tax. NPS offers an additional exclusive tax benefit of Rs 50,000 per annum for own contribution to NPS under Section 80CCD (1B).
In Union Budget 2023, the benefits under the New Tax Regime were enhanced, making it more attractive. And unless you pay house rent (and receive HRA) or are paying a home loan, it is quite likely that the New Tax regime will be more beneficial for you (compared to the old tax regime).
However, the New Tax regime does not offer any tax benefit for your own contribution to NPS under Section 80CCD(1B).
Hence, if you were investing in NPS purely for tax benefits, the reasoning will no longer hold true if you opt for the New Tax regime. If you opt for the New Tax regime, investment in NPS won’t fetch you any tax benefits.
This move REDUCES the attractiveness of NPS as an investment option.
Note: The tax benefit for employer contribution to NPS under Section 80CCD(2) is available under both old and new tax regime. Hence, whether your employer contributes to NPS won’t be a deciding factor.
#2 Taxation of equity and debt funds becoming adverse
Since 2018, the taxation of equity and debt funds has gotten adverse. The tax treatment for NPS, on the other hand, has become more benign.
Up to 2017
Equity Funds: Long-term capital gains were exempt from tax.
Debt Funds: Long term capital gains on debt funds taxed at 20% after indexation.
NPS: NPS maturity proceeds were taxable. Annuity payouts taxable at slab rate.
January 2018
Equity Funds: Long Term Capital gains on Equity funds start getting taxed at 10%. Made ADVERSE
Debt Funds: Long term capital gains on debt funds taxed at 20% after indexation.
NPS: NPS maturity proceeds taxable. Annuity payouts taxable at slab rate.
December 2018
Equity Funds: Long Term Capital gains on Equity funds start getting taxed at 10%.
Debt Funds: Long term capital gains on debt funds taxed at 20% after indexation.
NPS: NPS lumpsum withdrawal (up to 60% of accumulated corpus) exempt from tax. Annuity payouts taxable at slab rate. Made FAVOURABLE.
March 2023 (Current Taxation)
Equity Funds: Long Term Capital gains on Equity funds start getting taxed at 10%.
Debt Funds: The concept of long-term capital gains for debt fund investments made after March 31, 2023 withdrawn. All capital gains on debt funds (made after March 31, 2023) shall be taxed as short-term capital gains. At your slab rate. Made ADVERSE.
NPS: NPS lumpsum withdrawal (up to 60% of accumulated corpus) exempt from tax. Annuity payouts taxable at slab rate.
As you can see, the taxation of equity and debt funds has become adverse over the years while the taxation of NPS has become more benign.
In the case of equity and debt funds, the adverse tax changes do not only affect the post-tax returns, but also increase the cost of rebalancing the portfolio sharply. Every rebalance will involve friction in the form of capital gains taxes.
NPS offers tax-free rebalancing. There is no tax-cost, or any other cost involved in shifting among E, C, and G schemes in NPS.
Clear upper hand to NPS.
These tax changes over the years have INCREASED the attractiveness of NPS as an investment option.
What should you do?
This post is not about encouraging you to invest in NPS or discouraging you from investing in NPS.
I just want to present aspects that you might consider before allocating to NPS.
Listing down pros and cons.
Let’s start with the pros.
- Low-cost retirement product.
- Since you cannot take out money easily from NPS, makes it easier to stick with investment discipline and accumulate corpus for retirement.
- Mandatory purchase of annuity plan (many of us tend to underappreciate the value annuities can add to retirement planning)
- Tax benefit on investment for own contribution under Section 80 CCD(1B) and employer contribution under Section 80 CCD(2).
- Relatively benefit tax treatment at the time of maturity.
- Tax-free rebalancing
And the cons.
- Lack of liquidity and long lock-in period. You cannot easily exit NPS and take out money before the age of 60. If you do, 80% of the accumulated corpus will go towards annuity purchase. Hence, you can’t easily access your own money.
- Mandatory purchase of annuity at the time of exit (why should anyone tell you what to do with my money? If annuities are suitable for me, I will buy on my own).
- Active management
- For equities, there is a choice of just 1 fund with each fund manager. Not bad but a few investors may want more choices.
- Captive money: This is just my paranoia speaking. I am not usually comfortable with market-linked investments where the underlying funds (especially fixed income funds) are almost captive.
If you are considering investing in NPS and making up your mind about how much to invest, do consider all the above points in addition to the tax benefits and the fund performance.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.
This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.
Image Credit: Unsplash
