Investment in the National Pension System (NPS) has additional benefits apart from ensuring a disciplined approach to retirement planning. Apart from the tax deductions available up to Rs1.5 lakh under the overall ceiling of section 80C of the Income-tax Act, 1961, NPS also gets an additional tax deduction of Rs50,000 under section 80CCD(1B). This takes the total deduction up to Rs2 lakh, which means a saving of Rs61,800 for someone in the 30.9% income tax bracket.
If you are already a subscriber of NPS or plan to become one of its members to avail the tax benefits and the retirement planning facility, you must know certain important features of the product. One of the important aspects of NPS is that it gives subscribers some control over where their savings are invested. NPS subscribers, other than government employees, can choose between two options for how they select allocation to different funds. Both active choice and auto choice give you some control over where your money is invested.
To understand these options, let us first take a look at the different asset classes in which the various funds under NPS can invest.
Essentially, there are four asset classes to choose from.
A: This denotes investments in alternative investment schemes such as real estate investment trusts, infrastructure investment trusts or alternative investment funds.
E: These are investments in equity market instruments.
C: Investments in fixed income instruments, other than government securities.
G: Investments in government securities.
While asset classes remain the same for all subscribers, the allocations can change based on what the investor prefers.
This option is mainly aimed at assisting individuals who need help to decide asset allocation. It adopts a life cycle-based approach. When an individual is young, up to 35 years of age, it has maximum exposure to equity. The exposure then gradually reduces over the years, till the subscriber turns 55 years old.
In the moderate life cycle fund, for example, the default asset allocation under auto choice is 50% to class E, 30% to class C and 20% to class G, till a person is 35 years old. By the time of retirement, allocation to these three assets becomes 10%, 10% and 80% respectively, in a staggered manner.
After amendments to the NPS in November last year, a subscriber now has three life cycle-based funds to choose from. In addition to the moderate fund mentioned above, aggressive and conservative funds were introduced last year. If you choose an aggressive fund, you can have equity exposure of 75% till you are 35 years of age. This gradually reduces to 15% by the time the subscriber turns 55 and continues at 15% after that.
Equity exposure for the conservative fund is capped at 25% till 35 years of age and it gradually comes down to 5% in the next 20 years.
In case you do not choose a fund under the auto choice option, or do not make any choice at all, your allocation would be as per the moderate life cycle fund. Otherwise, you can choose from any of the three funds. None of these three life cycle funds invest in asset class A (alternative investments), as of now. They invest in equities, government securities and other fixed income instruments.
This choice is for those who want to decide the asset class allocation on their own. However, a cap of 50% remains for allocation to equity, and a limit of 5% for allocation to asset class A. After choosing your fund manager, you can spread the investment corpus among different asset classes, subject to their respective limits. Therefore, if you want, you can choose to invest the entire pension corpus in government securities or other fixed income instruments.
You can go from active to auto choice (and vice versa) but you can do that only once in a financial year. If you have moved to active choice, you can also change your asset allocation, again only once in a financial year.
If you are younger than 35 years and are looking for higher exposure to equity, you can select the aggressive fund in auto choice. Currently, this provides the maximum exposure to equity.
In arrangement with HT Syndication | MINT