Is it Wise to Invest in NPS After Retirement?

The regulatory body of pensions has taken several initiatives to increase the country’s pension coverage in the past few years. In continuation, it has raised the maximum joining age under the National Pension Scheme (NPS) to 65 years from 60. So, the subscribers who are between the age of 60-65 years are eligible to take NPS benefits. The subscribers to NPS, joining after 60, will get the same choice of pension funds and investment options as available to subscribers below 60.

NPS Returns and Risk

The major portion of the NPS corpus goes to equities. The maximum equity allocation can go up to 75 per cent. However, from 50 years of age, the equity portion is gradually reduced. If the investor is 60 years of age or more, the equity cap is fixed to 50% to balance the market volatility associated with equity.

So far, NPS has delivered 8 to 10 per cent of annualised returns which is higher than other fixed-income schemes. The annuity rates fetch better annuities for senior citizens than for those at 60 years or less.

Withdrawals/Exit from NPS

Before making any investment decision at the retirement age, it is always important to know about the withdrawal rules of the scheme. The subscribers applying for NPS Tier-I account after the age of 60 years can withdraw the funds in the following manner:

The NPS investor can normally withdraw after the completion of 3 years of investment. However, a minimum of 40% corpus should be utilised to purchase the annuity, and a maximum 60% NPS corpus can be withdrawn as a lump sum.

Premature withdrawal of corpus is available, but a minimum of 80% corpus should be used to purchase the annuity and a maximum of 20% corpus as a lump sum.

If the corpus amount is less than Rs. 2 lakh, the entire amount is paid as a lump sum to the investor.

In the event of the investor’s death, the entire corpus will be paid to the nominee.

The investor can choose to continue the NPS account up to 70 years or exit anytime after continuance and before 70 years of age. It is to be noted that the investor cannot join NPS after 65 years of age.  

Aspects to Consider Investment in NPS After 60

If you are working beyond the age of 60, say up to 65-68 years, which is a rare retirement time for someone in service, you can take the benefit of income tax deduction up to Rs.1.5 lakh under section 80C and Rs.50,000 under section 80CCD(1B). Also, you have the option to normally exit after the completion of three years. 

However, if you evaluate, there is a minimal duration available for investors above 60 years to continue with NPS. NPS performs well when invested for a longer period. Hence, there is less scope in terms of returns from NPS. 

Further, the tax advantage is only limited when investment is made to NPS. During exit, the Lump-sum amount received from NPS is exempt from tax. But the annuity (minimum of 40% corpus converted into the annuity), which may be insignificant, will be taxable in the hands of the investor. 

Hence, if you open an account after 60 years, be sure that you won’t need funds for up to 70 years. 

If you are not working anymore and don’t have much taxes to save, it is better not to lock your funds for three years in such a scheme with limited returns because returns from NPS depends upon the performance of the equity and debt funds, which generally requires a long duration to perform.

Further, any premature exit during an emergency is quite meaningless, as your 80% corpus amount will be stuck in the annuity.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in