I have been asked by many senior citizens and people close to their retirement (aged 55 years or more) if they should invest in NPS (National Pension Scheme)? Before November 2017, the maximum age to open NPS account was 60 years and hence senior citizens could not invest. However, PFRDA changed this and has increased the maximum age for opening of NPS account to 65 years (Download Circular).
NPS Rules relevant to Senior Citizens
If you read through the circular there are few things which are important to note from the perspective of senior citizens:
- Anyone up to 65 years age can open NPS account
- Investment up to Rs 50,000 in NPS Tier 1 is eligible for Tax Deduction u/s 80CCD(1B)
- Normal Exit Rule: The subscriber can exit the NPS after completion of 3 years. In this case they can withdraw maximum of 60% as lumpsum and remaining 40% has to be used to buy annuity, which would pay a monthly pension. However if the amount is less than Rs 2 Lakhs, the subscriber has the option to withdraw 100% as lumpsum without buying annuity.
- Premature Exit Rule: In case the exit from NPS happens before completion of 3 years, it would be termed as Premature exit. In this case subscriber can withdraw maximum of 20% as lumpsum and remaining 80% has to be used to buy annuity. However if the amount is less than 1 lakh, the subscriber has the option to withdraw 100% as lumpsum without buying annuity.
- In case of Death of Subscriber: The entire amount is paid to nominee of the subscriber.
Should Senior Citizens invest in NPS?
The answer if the senior citizens or people close to retirement should invest in NPS depends on why they want to do so? Most of articles I have read discourage aged people to open NPS account at this age mainly because you need to be invested for long-term to reap the benefit of this low-cost pension product. However, I have a bit different take on this.
Senior Citizens and people nearing retirement can open NPS if they are in higher tax bracket and are willing to invest just for tax saving purpose u/s 80CCD(1B). This NPS investment is tactical investment through which you can save or defer the tax to sometime in future.
Senior Citizens’ NPS Strategy
Senior citizens planning to get NPS account should invest Rs 50,000 in their Tier 1 account. This would give them tax deduction u/s 80CCD(1B). They are free to choose the asset allocation and can invest 75% in equity. As the idea is to invest for short-term (3 to 5 years), I would recommend having maximum allocation to debt category (government or corporate). If this tax benefit continues for years to come and you are still in higher tax bucket, you can keep contributing till next 3 years.
At the end of 3 years you would have contributed Rs 1,50,000 (Rs 50,000 for 3 years) and assuming returns of 8% you would have Rs 1.75 lakhs. At this time (end of 3 years) you can either exit or wait for a year without contributing. The idea is to have final corpus less than Rs 2 Lakhs. You would be able to withdraw 100% amount but only 60% is tax free. For remaining 40% amount you would be taxed at marginal tax rate.
This strategy works best for people who are close to retirement and know their income and hence their tax slab is going to come down in next 3-4 years.
What could be the pitfalls?
There could be somethings you should be careful about:
- The tax benefit u/s 80CCD(1B) can be changed anytime. In case this is abolished the entire idea of opening NPS is useless.
- Opening of NPS account is very easy can be done completely online. But the withdrawal process is not very streamlined yet and you may have to do a bit of running around/follow-up when doing so.
- Investing in NPS makes sense only if you are in higher tax bracket. If you are at 20% tax slab, you would be saving Rs 31,200 in 3 years in taxes. This would go up to Rs 46,800 for people in 30% tax slab.
- Do remember on withdrawal, if you do not buy annuity the 40% of NPS corpus would be added to your income and taxed accordingly. In case you are in higher tax slab while withdrawing NPS you’ll have to pay tax.
Download: ebook to Save Income Tax for FY 2019-20
So Is NPS good investment for senior citizens? The answer is Yes only if you are investing to save tax. Also you are in highest tax bracket right now and think that while withdrawing the NPS maturity amount you would be in lower tax bracket – which often happens after retirement.