Insights

“Corporate NPS is attractive for those who have exhausted 80C benefit”

June 12, 2013 . Vidya Bala
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Very few investors are aware of the additional tax benefits available under the New Pension System for Corporate employees says Vinod A N Fund Manager for Kotak Pension Fund in an interview with FundsIndia. This together with their low cost, transparency and market returns can make NPS a competitive and efficient product feels Vinod.

Excerpts from the interview:

How would NPS compare with other pension products?

There are quite a few options that people use today to save for their pension needs. Investing through Employee’s provident fund is one. Secondly, there is PPF. Thirdly, there are various pension options provided by companies. Then there are superannuation and annuity products available in the market.

Any financial product should be compared based on 4 parameters: tax benefit, returns, safety and the costs involved.

Some of the products like PPF or EPF and other pension plans are covered Section 80C where the maximum investment that will gain tax benefit is Rs 1 lakh. But NPS, if done through an employer,(corporate NPS) will enjoy tax benefit of up to 10% of the basic and is available in addition to the Rs 1 lakh benefit under Section 80C.

So that is a major advantage (pl. note that as an individual you may contribute voluntarily to NPS. That will fall under Section 80C limit of Rs 1 lakh).

In other words, if an employer is deducting 10% towards your NPS, it is not counted as taxable income. So whichever tax slab you fall under, you get a benefit. For example if your basic pay is Rs 25 lakh per annum of which say Rs 2.5 lakh is the 10% of basic pay. You can invest up to Rs 2.5 lakh in NPS and the same will not be included in your taxable income.

Next aspect is returns. If you see the 3 asset options (scheme G for gilt, Scheme C for corporate bonds and Scheme E for equities) available in NPS – one is the equity option wherein most fund managers are largely replicating index stocks; so that will deliver market returns.

The other, is corporate bond option, where investments are largely going into AAA or AA-rated investments. If you compare NPS with any of the traditional debt products or with mutual funds, returns have been relatively good. For example, Kotak Scheme C (Corporate Bonds) had a 14.96% return (as of March 31) over the last one year. Now this is better than the best of income funds and gilt funds. The return under Scheme G is also comparable to gilt funds available with mutual funds.

On the safety aspect, there is adequate of transparency in an NPS product. Besides, it is regulated by the PFRDA. In that context, Kotak and a few other fund managers have consciously kept the portfolios available online with portfolio updates available every month. That is the level of transparency we offer.

Moving to cost, fund management fee for NPS is currently capped at 0.25%. Taking in to consideration all other charges such as account opening, our calculation suggests total expense of 0.35% to 0.4% depending on the final contribution of the subscriber.

Let us take it to be 0.5%. Now, compared with other superannuation/ pension products which are available in the market, this is cheaper. Some of the superannuation plans I know are in the 1.25-1.5% range. Pension plans are higher than that. So NPS is relatively cheaper.

What is the most important benefit in NPS compared with other products?

Of these factors, the tax benefit is the most important one for corporate NPS. Most investors are not aware of the additional tax benefit that Corporate NPS provides, over and above the Section 80C benefit.

NPS has attracted the attention of employees with higher CTC and those who have already exhausted their 80C benefit and are in the high tax bracket.

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But currently, NPS, like other pension schemes is EET. (taxed at the time of withdrawal),The Direct Tax code regulation has proposed EEE (exempt at the time of withdrawal).This could be a game changer for the NPS product.

How important is the equity component in NPS schemes? Is a 50% allocation sufficient to beat inflation?

If you look at traditional products, they invest in debt. We have the new pension scheme for government employees, which invest 50% in government securities, 30 per cent in corporate bonds, 15% in equities and 5% in liquid schemes. The investment pattern is fixed and the flexibility is limited to allocation made in government securities.

Here the NPS available for non-government employees is differentiated as it allows up to 50% in equities. I would tend to believe that if you take the earnings growth of the index stocks, it should give at least 14-15% returns, if you leave the 3 years which was an exception period in the equity market in recent times.

If you take a longer period, equity (as of 2012) gave a 17% CAGR over a 10-year period. Let us assume a more moderate 14% return on an average. In an NPS portfolio with auto choice, where 50% would be in equities, 7% would come from equity (weighted average).

If corporate bonds yield even a conservative 8%, then the 30% exposure to it would generate returns of 2.4%. The balance 20% in government securities, even if it returns 7%, your return from it would be (20% of 7%) 1.4%. So totally from these 3 exposures, you get 10.8% on a conservative basis added to which there would be tax benefits.

Assuming long-term inflation of about 6%, this equity is sufficient to beat inflation.

What are the key changes in the revised NPS guidelines that will have a say on investor’s portfolio?

Earlier, NPS funds were allowed to invest in index funds, ETFs and index stocks. But stocks have to be in the same weight as the index. Some of the funds invested in ETFs, some in indexed funds and some invested directly in stocks.
Now the new guidelines say that fresh investments shall not be made in index funds or ETFs. It will be directly in stocks. The universe is the list of BSE and NSE stocks that are into derivatives. That gives about 149 stocks to choose from.

What is the game changer here? The fund manager now has the choice to adopt an alpha strategy. Returns can therefore be at variance to index returns – higher or lower.

For existing portfolio, fund managers have the choice of staying with the index.

If you see Kotak’s portfolio, we had almost 100% in index funds but now we have reduced this to 25%. We have invested the remaining in stocks from the Nifty basket. Once corpus grows we may have an active alpha strategy. Investors can refer to Kotak’s download section to check the portfolio of the funds.

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The purpose of this change is not for active management. It is to ensure that there is a uniform strategy and comparing peers becomes easier. Earlier, when the NPS funds invested in a combination of index funds and index stocks, there was a variance in capturing returns since Index funds had one day lag.

There have been other changes in the revised guidelines that include restricting exposure to a single industry and single group. These checks can be expected to reduce a portfolio’s risk profile.

Your debt schemes have done well. Is your strategy different from mutual funds?

Any return in debt schemes would be a function of 2 factors: the yield which you are locking into and capital appreciation or depreciation. During the recent phase where yields have fallen, yield in AAA bonds have fallen sharply. In our corporate bond we have about 85% in AAA – rated instruments with top credit rating and thus managed to deliver 15% in the last one year.

In our gilt portfolio, being a Pension fund mandate, our average maturity would be higher than 10 years which may not be the case with mutual funds, the portfolio may be akin to Insurance portfolio ( long term). While our maturity may be slightly more long term compared with mutual funds, our strategy is no different.

Yes, one benefit that we have when compared with mutual funds is that we do not have the redemption pressure that mutual funds would have. So we optimally benefit from the fall in yields.

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The yield on corporate bonds moved much more, by 40-50 basis points. In fact, this has been so in AAA-rated instruments. Let us say you are locked at 9% and yields have moved up by 40-50 basis points, then a 10-year bond will give a 6-7 paisa appreciation per basis pointyield. That’s the reason for our Scheme C’s outperformance.

How suitable is it to have high proportion of G secs in one’s portfolio, especially closer to retirement, given that there are interest rate risks of holding gilts?

If you have at least 10-15 years then you will get the coupon rate and the risk of capital appreciation or depreciation is not there. The risk arises when you have a shorter time frame as there can volatility in the short term.

Even in the short term, you need to look at the relative risk. If G-Sec yields rose by 1% (which is very high estimate) then you would lose about 7% of your capital. But on a net basis it would be lower or even positive, if you take in to account the coupon accrual (interest on the government security).

In equity, the loss in a down market can be much higher. Hence the call is whether to hold equity or gilt, especially when you are closer to retirement.

One other option available now is that you can defer your withdrawal of retirement corpus (excluding minimum 40%). Earlier you had to withdraw minimum 40% and defer the rest over the next 10 years. Now the balance can be withdrawn fully anytime before attaining age of 70. Hence, you need not exit when there is short-term volatility, especially in gilts.

When should investors consider the auto choice in NPS?

People who have less understanding of market dynamics can go for an auto choice in line with their life stage.

What factors should investors consider while choosing an NPS manager?

Investors would do well to look at the consistency in returns of the fund, the regularity of portfolio disclosure and the quality of the portfolio that the fund has.

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20 thoughts on ““Corporate NPS is attractive for those who have exhausted 80C benefit”

  1. Dear Vidya,

    A wonderful article.

    I have few questions on this NPS part.

    1. Can all companies open NPS accounts for their Employees?
    Can We (In IT Services field) request our employer to start deducting this NPS, and will it be entertained.
    OR, we have to go through any process first, before requesting.

    2. What is the Minimum amount that should be invested in NPS per Annum?

    3. Is it mandatory for every company (If requested by Employee) to open Corporate NPS for that particular Employee? Or it is on sole discretion of the Company to open or not?

    4. Do we have any Lock in for the amount invested?

    5. How do we change our NPS, if we change companies?

    Thanks in Advance,
    Sunil.

    1. Hello Sunil,

      I shall reply some of your queries here and the rest you can learn if you read FundsIndia’s info on NPS, in the website

      1. All companies can open. Whether NPS will be entertained or not will be the sole discretion of the company based on the demand that the employees place.

      2. Pl. see http://www.fundsindia.com/npsforcorporates for corporate NPS and http://pages.fundsindia.com/pages/learning/using-fundsindia/#6 for regular NPS.

      3. Not mandatory

      4. Pl. refer the links above

      5. A switch is possible only if the new company you join has an NPS. Otherwise, youa re allowed to continue this account by converting it in to regular NPS and making just your contribution alone.

      Tks
      Vidya

  2. Thanks for the useful article Vidya.

    I have few questions:

    1. How can I transfer my existing NPS to fundsindia account?
    2. How to identify whether the NPS account that I hold is an individual or corporate NPS.
    3. If the present NPS is individual then How can I convert it to corporate account?

    1. Hi Hari,

      1. Kindly contact our customer support.
      2. If your corporate employer has opened the NPS for you, it is a corporate NPS. if you have opened in your own capacity it is a regular NPS account.
      3. You cannot. Your employer has to open a corporate NPS account.

      tks
      Vidya

      1. Hi,

        I recently read about NPS and without reading it completely on internet. I went to ICICIDIRECT and requested for opening of NPS account. 🙁

        Now, i got to know, that it would be an individual account and not a corporate one.
        Moreover I won’t get tax rebate on it. 🙁

        Even if my company agrees to open NPS then I have to open one more NPS account that will be corporate…That means 6000/- p.a. into this account + some other amount into corporate NPS…

        Is there a way, by which I an cancel the NPS account opening request?

        1. Yogesh, You have to check with PFRDA. You will get tax deduction upto Rs 1 lakh under 80C in individual NPS. Just that corporate NPS is over and above 80C. thanks, Vidya

  3. From taxation point of view, corporate NPS is definitely good. However, one major drawback of NPS is the compulsory annuity of 40% of the corpus for Tier-I account. The returns on annuity are not good and this reduces the attractiveness of NPS over its entire lifecycle. It would be interesting if somebody calculates the IRR of NPS including compulsory annuity.
    Regards,

    1. Hello Shirish,
      “The returns on annuity are not good and this reduces the attractiveness of NPS over its entire lifecycle”.
      Much of the lifecycle of an NPS is the ‘savings’ part. NPS is very likely to provide far superior returns to PPF or EPF for building wealth. So first, NPS has to be viewed for much part as a corpus building vehicle for retirement. Next, yes annuity products are meant to be conservative as their aim to provide regular income. But if the wealth built is a good sum, then the annuity that you will ensure a decent monthly income. Also, the very idea of NPS is to provide pension. Pension is done only through annuity products. When people are willingn to pay for annuity products outside (which also do not build wealth efficiently), there is far higher reason to go for NPS, where the wealth-building phase will be much more robust than regular plans with insurers.

      Also, the IRR of the wealth building phase should not be combined with returns in the income flow (annuity period) space. They are bound to be different and not comparable given the asset classes they invest in.

      Besides, there are a lot of approved annuity providers including private players whom you can choose. Annuity should be viewed as a fixed income provider and as an insurance. Some of the features of the annuity are as follows:
      ANNUITY
      Pension payable for life at a uniform rate to the annuitant only.
      Pension payable for 5, 10, 15 or 20 years certain and thereafter as long as you are alive.
      Pension for life with return of purchase price on death of the annuitant (Policyholder).
      Pension payable for life increasing at a simple rate of 3% p.a.
      Pension for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
      Pension for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.

      From the above, it is obvious that you have enough choice to even take shorter periods and later invest the amounts yourself.

      Thanks
      Vidya

  4. Dear Vidya, This is a very informative article and after reading this I wish to request my employer for NPS enrolment, however, I wish if you can please elaborate this point which I came across while browsing through the links that you provided :

    “Corporates can claim tax benefits for the amount contributed towards pension of employees. From 1st Apr, 2012 upto 10% of the salary (basic and dearness allowance) of employers Contribution can be deducted as ‘Business Expense’ from their Profit & Loss Account.” Reference ~ 5.2 Benefit to Corporates, PRFDA Offer Document For NPS For Corporates.

    This will help me in putting my request convincingly. Thanks,

    1. Hello Shubhankar,
      There are certain expenses that a company spends, but that are not allowed as deduction for tax calculation purposes. The more deduction as ‘business expnese’ that a company gets, the lower will be its taxes. Until March 2012, an employer’s contribution to NPS (corporate) was not allowed as a business expense deduction. From April 2012, an employer can claim this as expense. To this extent, the employer’s tax burden will be lower. Hope this helps.
      Keep in mind that an employer need not even spend more by paying more for this. The company can simply modify your pay structure by bringing certain heads of income under NPS.

      Hope you had a chance to see this article on NPS as well: https://blog.fundsindia.com/blog/personal-finance/its-time-you-asked-your-employer-for-corporate-nps/2619
      Thanks, Vidya

  5. The NPS is managed by 5 Asset Management Companies, each with their own E, C & G options. Do the schemes have different Growth levels? If so, where can we get a daily feed on how each of the options of all the 5 fund managers are performing in one go?

    Mutual Fund schemes have a fund snapshot that shows industry wise and Co wise exposure from time to time. Is thete any such data for NPS schemes?

    1. Hello sir, the equity (E), Corporate bond (c) and gilt(g) will certainly have different return levels as they invest in diff. asset classes. NAVs as well as monthly portfolios are currently disclosed by some fund houses such as Kotak, Reliance, ICICI and IDFC in their pension websites. If tou hold accounts in portals such as FundsIndia, then returns will be availble in your account as well. TKs, Vidya

  6. Hi Vidya,
    Can you please tell me which of the following is better with an example figure?

    1) NPS for 30 years
    2) SIP for 30 years.Purely into equity- growth

    Thanks,
    Vikas

    1. Hello Vikas,

      Theoretically from a pure return perspective, an all equity portfolio should do better. NPS can invest only up to 50% in equities. Hence, the 2 are not strictly comparable. If an all equity fund portfolio delivers 12% and a conservative NPS with high debt (say 90%) delivers 9%, the latter’s post-tax benefit (sec 80C) would still be only 10.3% over 30 years. But for a 50:50 equity:debt portfolio, if the equity part of NPS delivers 12% and debt delivers a good 9% then the total returns post 80C benefit, at 11.8%, would be close to that of the equity fund portfolio.
      NPS has the advantage of providing diversification and reducing volatility and also providing the option to slowly reduce one’s risk exposure. Besides, it serves as a ready pension plan, as a part of it is annuitised. Both a mutual fund portfolio and an NPS have room in a retirement portfolio. It need not be restricted to one.
      Tks
      Vidya

  7. Hi Vidya,
    I already have an individual NPS account. If the company wants to contribute to my account, should I convert it to corporate account or can the company still contribute and still claim deduction even though the account is individual? What if some employees have individual accounts and some employees have corporate account?

  8. hi vidya
    I am a state govt employee compulsorily 10% of my basic and D A are deducted from my salary ..
    whether that can b deducted above 1 lakh or not ?////

  9. Hi Vidya/Funds Team/Experts,

    I am non govt employee, My corporate employer has provided components called “Superannuation Fund Contribution” where as a employee can contribute max 15% of basic so i have started investing in this components from past 2yrs so please
    1. Tell me is it taxable components?
    2.how is this Superannuation Fund shall i continue with this or stop investing?
    3. My employer even provide NPS so ll i need to open IND or Corporate account to get extra tax benefit?
    4. so if i go for NPS then ll stop investing in Superannuation Fund?
    5. in NPS which one is better active or auto cycle?
    6. Which one is good from these PFM ICICI/Kotak/LIC/Reliance/SBI/UTI?
    Note :- i am 33 yr old fall under 30% tax bracket In 80c i have 75% in ELSS 25% in PPF so help me to choose best PFM name for NPS or ll i go for auto cycle?

    Waiting for your kind suggestion

    Thanks
    Rajesh J

    1. Hello Sir,

      1. We would suggest that you talk to your employee on the taxability of your superannuation fund, since it varies based on whether it is an approved fund or not. Here is a link that will give you all tax treatments of retirement benefits: http://www.incometaxindia.gov.in/Tutorials/Retirement-Benefits-Theoretical.pdf
      2. NPS – if it is corporate NPS and you arein the high tax bracket, you can consider going for it…but if you wait for some time, we might soon have laws where NPS need to be offered as an option to EPF (budget had this proposal). Hence, you can wait for it in our opinion.
      3. There is not much difference in performance of schemes across the said AMCs as their active management is not high. So choose one of them and change later based on performance.

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