‘Exiting’ from NPS – Part III

We all know that the product design of NPS is such that at the time of retirement one should utilize at least 40% of the accumulated corpus for purchase of annuity. However, from my previous articles, by now, you may have understood the importance of opting for higher amount of annuity corpus as well as the benefits of postponing the annuity purchase post retirement age of 60 to 75.

?

Here, let me give you an interesting insight of how one can smartly exit from NPS and make efficient tax savings.

?

We all know that the lump sum withdrawal of maximum 60% that is allowed in NPS upon attainment of superannuation (i.e. retirement) is ‘tax free’. However, at the time of retirement, a retiree usually sees inflow of funds from various sources such as gratuity, accumulated savings funds, leave encashment etc.

?

In such a scenario what happens is that if one opts to reinvest the ‘tax free’ lump sum NPS corpus into another product for the purpose of generating income, then that income will become taxable.

?

Generally, when a person opts for the lump sum NPS withdrawal at the time of retirement, the next question that looms before the person is ‘where to park the money’. Given the general diaspora of Indian seniors, the most preferred investment avenue to park funds for the retirement years is Fixed Deposit (FD), Senior Citizen Savings Scheme (SCSS) or perhaps any other scheme which might provide regular periodic (monthly) pay-outs.

?

In case of two of the aforementioned instruments, i.e. FD and SCSS, we know that both the instruments currently generates a return of around 7-8%. It is also pertinent to note that the return fluctuates on periodic basis. In case of FDs, they are popularly available for up to 5 years and sometimes up to 10 years, though with less attractive features. There is also the option of renewal of FDs upon maturity. However, one has to consider the risk of renewal in terms of administrative charge and fluctuating interest rate (which invariably end up on lower side at the end of the maturity period) that can possibly lead to reduced income for the investor. As far as SCSS is concerned, there is ceiling on the amount that can be invested.

?

The tax implication of the above instruments is also something that needs to be looked upon, as the returns are taxed as per tax bracket of the individual.

?

Another instrument which is gaining popularity amongst the senior citizens is Mutual Funds. However, apprehensions to invest into Mutual Funds is galore, given the fact that one does not get assured returns. One also requires regular cash payout (pension) immediately after retirement which may not be possible with Mutual Fund as it needs long term investment to generate good returns. Most importantly, it requires that one is not risk averse. Further, Mutual Funds investment requires adequate research in order to identify a fund to invest in, remain invested for a fairly good amount of time to get decent returns and finally, the returns are not assured. In case one chose to use Mutual Fund for regular payout, the Long Term Capital Gain Tax and Short Term Capital Gain Tax is inevitable.

And that is where the superiority of NPS stands out. From my previous article and illustration we have seen how total NPS corpus of Rs. 50 lakhs at the age of 60 becomes Rs. 1.07 crs at the age of 70, assuming 8% growth rate. In this scenario, rather than opting for lump sum withdrawal at the age of 60 and reinvesting the same (as I mentioned earlier) into another product, one can opt for staggered withdrawal (i.e. Systematic Withdrawal) each month for 15 years (i.e. till age of 75). The advantage with this is that, the balance amount remains invested in NPS and will appreciate over the remaining period. More importantly, capital appreciation during the 15 years would be tax free and one would also not have to pay tax on the regular monthly withdrawal – which would in turn act as monthly pension!

Let us understand with a new example of Rs.1 Cr corpus at the age of 60 years which shall allow you Rs.60 lakhs (60%) lump sum withdrawal. Instead of one time withdrawal, one can withdraw Rs.50 K per month. Ideally the corpus would get exhausted by the age of 70 years (50K x 12m x 10 yr). But as the underlying corpus will remain invested (@8% p.a.) this Systematic Withdrawal can run till the age of 75 and there will be handsome residual balance for bullet withdrawal. This is in addition to the annuity which would continue much beyond 75 years. I would cite this as a smart cash payout from NPS.

?I would like to conclude with the fact that currently, NPS is the only product wherein one can go for a smart withdrawal, periodically and systematically, up to the ripe age of 75! This along with the added benefit of tax advantage is definitely a combination that can be matched by no other product.

?

That is why NPS is a product that I strongly resonate with. Though I may be a lone wolf now amongst the few naysayers of NPS, I am confident that the popularity of NPS will only soar in the coming times. NPS is definitely here to stay and I shall continue to tread this path to bring about awareness and also enlighten people about the benefits of NPS.