The name of the reader does not matter….here is it

My employer is starting to provide option to employees to opt (voluntary, not mandatory) for NPS Corporate sector model in which employer will deduct my Special Allowance (which is fully taxable@20.6%) with an amount of Rs 3675 (10% of my basic salary of 36750 per month) and deposit this amount in NPS account which will save me 20.6% of tax as per IT section 80CCD(2). This will save me Rs 9100 per year as income tax savings. However employer will also deduct Rs 500 per month from my salary so as to deposit Rs 6000 per year in my NPS account since 6k is minimum which u need to invest as an employee.

This will not save me any tax as I consume 80C anyway with PPF and EPF. Now every transaction in NPS has charges of Rs 23 (charged by POP including sevice tax) so total cost will be Rs (23*24=552) + Rs 350 (Annual maintenence charges by CRA) totalling Rs 900 as charges for an amount of Rs 50100 yearly. This is 1.8% as charges and 0.25% fund management charges so total charges will be 2.05% which seems quite high if compared to mutual fund like QLTE (1.25% only).

However saving of 20.6% as income tax should well offset this 2.05% charges.

Hence I want your expertise analysis as to whenther I should go for this NPS option. The negatives which I have in my mind are taxable pension, taxable lumpsump withdrawl, compulsary annuity, cant exit even if PFRDA increases charges further during next 30 yrs ( 60 minus 30 yrs my present age), limitation of 50% equity, less returns as compared to diversified MF which are tax free after 1 yr.

Please help me to decide. I dont want to get trapped in a product from which I cant exit for next 30 Yrs. Thanks.

ANSWER:

Go for it.

I am not a big proponent of NPS, but in your case the saving in tax offsets the cost disadvantage. Also to some degree you can reduce your contribution to ppf (if it is a cash flow issue) or increase some equity portion (remember ppf, epf and 50% of Nps are all debt – and poor quality debt if u ask me).

If you can afford the cash flow go for it. Also how it will be treated in tax after 30 years is just a guess work. What happens if all instruments are taxable or all are tax free? So tax instruments with a 30 year ‘view’ has to be WRONG. 30 years later we are not even sure how will our country’s map be, forget tax position!

Hope it answers your query.

 

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  1. Hi Subra,
    You mentioned

    (remember ppf, epf and 50% of Nps are all debt – and poor quality debt if u ask me). What exactly do you mean by the above statement? Does this mean that they are not investing in AAA rated securities? Would you suggest any other debt instruments in their place?

  2. The tax saving from the employer contribution is pretty significant.

    One of the most important things I have learnt from your blog is

    ‘how (an instrument) will be treated in tax after 30 years is just a guess work’

    There is a lot of bad press about NPS, but most of it harp on the wrong reasons like taxation.

  3. A clarification – what your reader said about his company, isn’t it permissible for any company ? I thought that it was like employer contribution to PF, so if you open an NPS account, your employer will start making that contribution (cut from your CTC).

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