NPS inflow surge bodes well for old age income security net in the country

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The inflows into the National Pension System (NPS) have seen a sudden surge. The data released by the Pension Fund Regulatory and Development Authority (PFRDA) on May 26, 2021, shows that Indian investors are taking a liking to the NPS as a pension product. While the assets under management (AUM) for NPS and the Atal Pension Yojana (a scheme for the weaker section under the NPS umbrella) has crossed the Rs 6 lakh crore mark for the first time, what is more significant in that the inflow of the last Rs 1 trillion came in barely 7 months. NPS has been in existence for 13 years now.

NPS subscriber base expanding However, what is even more heartening than the AUM figures is the widening of the subscriber base of the NPS. With 74.10 lakh government employees and 28.37 lakh individuals from the non-government sector joining the scheme, the total subscriber base of PFRDA has increased to 4.28 crore. The expanding subscriber base shows that more and more people are becoming conscious about the need to save for retirement and build a corpus for old age income security.

That the sudden surge of NPS inflows came during the current Covid-19 pandemic cannot be glossed over. As Supratim Bandyopadhyay, Chairman, Pension Fund Regulatory and Development Authority (PFRDA), which administers NPS, has rightly observed that this could be due to the “growing realisation during this pandemic is the priority accorded by individuals to retirement planning, for preserving their financial well being.”

Long-term goals The Covid-19 pandemic and the havoc it has wreaked on the lives and livelihood of people has surely been an eye-opener for all those who ignored the benefits of long-term financial planning. Besides planning and saving for life goals such as education and marriage of children, a good financial plan includes being prepared for health emergencies with adequate insurance and long-term goals such as retirement.

Retirement planning is crucial for everyone in a country like India which has a very weak social security net. Among the many options available, NPS is emerging as one of the key instruments through which one can plan for income security during old age. NPS features, including the possibility of high equity investment of subscriber money, make it one of the best investment options for retirement planning.

Strong incremental inflows Besides the Covid-19 eye opener, what would have worked in favour of the NPS during the past months when it saw strong incremental inflows adding up to Rs 1 trillion in the past seven months has been the strong showing of the equity market during the period. The Indian stock markets have shown immense strength during the past months and have touched new highs. In fact, the Nifty-50 touched another record high on May 27 of 15,337. Since NPS gives the choice of investing up to 75 per cent of the subscriber’s money into equities, it provides a great avenue to take dual advantage of riding the equity bull-sun and creating a larger retirement corpus in the long run.

The possibility of a high equity component of the invested money would work wonderfully for those who join the NPS at a young age as it would allow them to ride through all market cycles and create a large corpus for old age income security. Risk averse investors can opt for a high debt component with even the entire money being put into corporate or government debt instruments. Subscribers also have the option to opt for up to 5 per cent to be invested in alternative assets.

NPS might have also seen heightened inflow towards the end of the previous financial year as many would have opted to invest in it due to the additional tax deduction that it provides. NPS subscribers get an additional tax deduction of up to Rs 50,000 over and above the Rs 1,50,000 deduction permitted under Section 80C of the Income Tax Act which has been a major pull factor.

Maximum withdrawal capped Among the few drawbacks of the NPS is that it allows a maximum withdrawal of 60 percent of the accumulated corpus at the time of maturity while the remaining 40 percent is used mandatorily for buying annuities from insurance companies, which provides regular income to the subscriber. However, while the 60 per cent is tax exempt, annuities are not tax-efficient. Going forward, the PFRDA can consider giving other options to its subscribers such as a systematic withdrawal plan, thereby adding to their flexibility with the accumulated money.

While NPS is emerging as the centerpiece of old age income security, there are other instruments too which can be used to create a retirement corpus such as the Public Provident Fund (PPF), Employees Provident Fund (EPF) and its derivative the Voluntary Provident Fund (VPF) and other pension funds offered by insurers. Subscribers should choose the best instrument suited for them or a combination and invest regularly so that they are not caught napping when their earning ability diminishes with age.