What were the changes brought in by the Pension Fund Regulatory & Development Authority (PFRDA) last month?
Kurian Jose: We keep saying that NPS is a tax saving season. I think it is an all-season product and it should treated as an all-season product. It just so happens that human tendency is to keep everything for the last moment. So, for tax purposes, Jan-Feb-March becomes the last moment, it becomes a tax saving season. But I believe that it is an all-season product.
Coming to the changes, I think quite a few interesting changes have been brought in by PFRDA to make it a little bit more simpler because finance as a subject tends to be a little difficult and most people get put off as soon as you talk about finance. PFRDA wants people to think about retirement and pension when they are young because by the time people start investing and thinking about retirement, it is too late.
Initially, you want to build a house and have EMIs to pay or pay for rentals and then everybody keeps saying like at 25, it is too early for me to think of retirement. I think what PFRDA is trying to do is talk to the young people. Quite a bit of work has been done in the digital space. They have introduced something called investing through a QR code and that is because most consumers today are used to just opening a smartphone, scanning a QR code and just getting invested.
So, there is a Demat account and a QR code. I think the systematic withdrawal plan, systematic lump sum withdrawal, or SLW, has been a great introduction that has come in. Earlier, people used to invest till they were 60. At 60, they could take a lump sum money out tax-free and with 40%, you had to buy an annuity. Now, what it allows you to do is you can stay invested till you are 75. You can invest from 18 to 70. But you can stay invested till 75. So, there is no compulsion for you to take the money out at 60. You can let the money grow and money grows pretty well, compounds pretty well
Looking at the last 10-year returns, equity has given about 15% to 17%. G-Sec has given about 11%. Corporate bonds have given about 9%. So, allow your money to stay invested. And the power of compounding is the eighth wonder of the world. Withdraw the money as per your requirement. You can withdraw it quarterly, half yearly, or yearly.After 60?
Kurian Jose: After 60, yes. So, till 60, the money stays locked in. After 60, you can keep 60% of the money as corpus and let it grow. With 40%, you necessarily have to buy an annuity.Something on partial withdrawals also?
Kurian Jose: Yes, partial withdrawal, what is happening is you can withdraw till you are 60, but only up to 25% of your corpus. So, any money that you have put in on yourself. So, there are three ways of investing. So, one is the all-citizen model, where you and I can invest, for which you get the 80C benefit. Then, you have that Rs 50,000 which you get 80CCD(1B), that is again, your contribution. But there is something, the income tax advantage that you get, which is the 80CCD(2), which is the corporate deduction, the corporate NPS, which is very popular.
There, what happens is the company deducts or invests on your behalf. Obviously, the CTC does not change, but that is seen as the employer contribution. That is an aspect you cannot withdraw. So, you can withdraw up to 25% of your contribution in case you need a requirement like children’s education, buying a house, a new venture. So, there are some criteria that need to be followed when you can take that money out.
And how many times can you do it?
Kurian Jose: You can do it thrice in your entire investment duration and every time, it has to be 25%. of your corpus. This does not include appreciation, this does not include your employer contribution.
This begins after the third year of investment, right? You cannot just do it immediately.
Kurian Jose: Yes, that is correct. So, money has to stay. Since you are getting advantage of tax when you invest. So, this is an EEE product, so you get tax exemption when you invest, tax exemption while you are there, and when you withdraw the money 60% of the money is tax-free for you and even when you buy the annuity, there is no GST, there is no tax payable for that.
Only when the pension money comes from the annuity, you have to pay tax, but that is the tax regime you are in at that time. So, it could be 60-70. You may have no other income and this is the only income, so your tax bracket would be that much less.
You get a tax benefit only if you are an old tax regime taxpayer?
Kurian Jose: There are two ways to look at it. In the old regime, you get all the benefits of 80C, 80CCD(1B) and 80CCD(2). But in the new regime, you do not get the first two. You get the benefit of 80CCD(2), which is the corporate deduction. So, if you are doing corporate deduction, you get benefits in the new tax regime as well. So, a lot of people think that it does not make sense to do NPS if you are in the new tax regime and a lot of people switch. People in the 7 to 10 lakh bracket, they say, I do not need these exemptions, I want to have more cash in hand, but this is a way that you can use 80CCD(2) benefit from income tax for the new tax regime as well.
Could you also give us a bird eye view on the entire inflow in terms of schemes, that is the numbers that we are talking about?
Kurian Jose: There are two aspects of NPS. It was originally created for the government sector because when this started in 2004, it was called a defined benefit plan. Defined benefit means once you retire, for the rest of your life, you would get 50% of that money till you pass away. Now, that means that you are creating a big liability because longevity has increased and males live up to 77-78 and women up to 80 years. So in 20 to 30 years, people could live up to 100. So, 30 to 40 years of money had to be footed by the government and that would only be possible if you borrow and that is increasing the government liability.
So, defined benefit was changed to defined contribution where you would contribute the money, you would contribute along with the government on your behalf and that whatever you grow and that amount can potentially be higher than the 50% as well. It is just that from 2004, you have not reached a stage where these people are retired yet, so this is a wonderful scheme.
It is just that people do not really know about it so much. So, 85% of the corpus of NPS is with the government sector and 15% of the corpus is with the private sector where you have about 10 fund managers in space. So, from a growth perspective, if you look at the space, from an AUM perspective, there has been almost 30% growth in the industry.
From the corporate sector itself, the growth has been about 35%. The all-citizen model, the growth has been about 24% and that growth has significantly come in Jan, Feb, March because of what you rightly said, the tax season. So, if you look at the flow, a large portion of the flow, almost 35% comes into equity. About 40% comes into the G-Sec category because you are also entering into a stage where you are expecting rates to come off. So, you benefit maximum from the G-Sec. The corporate bond has been about 20-25%, so that has been the rate of flow.
Talking about the fund managers, I think there was a change over there also.
Kurian Jose: Yes. So, there are two aspects again. You can change a fund manager once a year without any tax incident. So, you can change asset classes four times a year and fund managers once a year. What was introduced recently is that you can now have three fund managers at any particular point of time. So, there are four asset classes, which is equity, corporate bond, G-Sec and alternate assets. Between these four, you can now select one fund manager for equity, one fund manager for corporate bond, one fund manager for G-Sec and the fourth one for alternate assets. You have to select one of these.
So that is also a recent addition because PFRDA may have looked at it in the mutual fund space, which comes closest, you have multiple fund managers managing multiple asset classes. I think they have given that choice to subscribers that you may like to invest with Tata Pension Fund for equity, maybe some other pension fund for G-Sec and a third fund manager for gilt so that is a new introduction that has come up recently. Maybe it is not as popularised yet.
How has the return been so far across schemes?
Kurian Jose: The returns have been stupendous. I was looking at the last 10-year returns, equity has given 15% kind of return, G-Sec has given 11% return and corporate bond has given about 10%, this is the best return and plus-minus 1% is the return. If you look at the one year category, equity has given up to 37% and we are happy to know that we are the best fund manager currently in the equity space.
The G-Sec has given about 11% here and corporate bonds have given 9. So, G-Sec and corporate bonds have given 9-10% returns. These returns are obviously because rates have come off and you got mark to market gains. Corporate equity anything between 15% to 18% to 37% currently, obviously this may not be sustainable but that has been the range in the last 1 to 10 years.
Where do you think a push is needed for this particular product in the market?
Kurian Jose: The awareness is the biggest one. What generally tends to happen is most advisors are not talking about it because a), remuneration is less. b), There is always this inertia and people feel they need more cash in hand and I already have PF deductions. The products that I go to are people my parents knew about. The kind of assured returns like the FDs or the LIC, those are things which have been there and people have talked about it.
This is one of India’s best kept secrets because people do not really talk about it because there is no money in this whole game. But the way I look at it is this is India’s answer to social security. We have no other product available and this is the only product where when cash flow stops at 60, that kind of helps build up equity that you have a secondary income because most people need the secondary income when your primary income stops.
This shows that you need to give some self-love to yourself that you need to take care of yourself as well as your family. But if you are not able to take care of yourself, how can you take care of your family? That is why NPS is extremely important and should be part of everybody’s asset allocation compulsorily. You get a tax advantage plus a very low-cost product. It is regulated by the Government of India. There is participation of government sector employees as well as private sector employees. It is a complete win-win for everybody in it. There is no reason why anybody should not be investing into NPS.