Will NPS Subscribers Benefit If Pension Funds Invest in IPOs?

Are you looking to give your investments a touch of equity? Do you want an investment that offers inflation-beating returns over time? You could consider investing in the National Pension System or the NPS. It allows you to invest in equity instruments right from your first job and build a corpus for a comfortable retired life. Moreover, NPS offers tax benefits which you may avail if you fall in the higher income tax brackets. However, will PFRDA, the pension fund regulator in India, allow pension money to flow into IPOs?

What is the National Pension System?

The National Pension System or NPS is a government-sponsored pension scheme. You may invest in the NPS if you are salaried, self-employed, or even an NRI to build a corpus for a comfortable retirement. You can invest in the NPS if you are between 18 to 70 years old. 

You will find two different accounts under the NPS called the Tier I and Tier II account. You have to open the NPS Tier I account when commencing your investment in the NPS. However, the NPS Tier II is a voluntary account. 

You have NPS investing your money in the different asset classes of equity (E), corporate debt (C), government securities (G) and alternate investment funds (A). The NPS offers you the active choice where you decide on the allocation across different asset classes. However, you have the maximum allocation of 75% towards equities. 

You also have NPS offering you the auto choice or the default option. It is a lifestyle based approach where the asset allocation depends on your age. Moreover, you can choose from three life cycle funds under the auto choice option depending on your financial goals and risk tolerance. 

You have NPS as a pension product, and you must stay with your investment until you are 60 years old. You can withdraw 60% of the accumulated corpus on retirement as a lump sum amount, tax-free. However, you will have to use the remaining 40% of the corpus to purchase an annuity plan. It helps you get annuity income after retirement. 

Will NPS Subscribers Benefit from IPO Investments?

NPS has a subscriber base of over 30 lakh as of 14 August 2021. Moreover, the total NPS corpus is close to Rs 1 lakh crore. The PFRDA proposed several amendments in the Pension Amendment Bill to make NPS a more lucrative option to investors in the scheme. 

Let’s look at some of the PFRDA proposals and how the government has reacted to them.

  • The Government of India has accepted the PFRDA proposal to raise the Foreign Direct Investment (FDI) limit in pension funds from 49% to 74%.
  • The government has allowed pension funds to invest in initial public offerings or IPOs. 

The government gave a nod for the PFRDA proposals helping NPS subscribers in the long run. For instance, PFRDA allowed pension funds to invest in stocks with a market capitalisation of Rs 5,000 crore and a presence in the Futures & Options segment. However, PFRDA currently enables pension funds to invest in the top 200 companies on the Indian Stock Exchange.

The government’s move to raise the FDI limit in pension funds from 49% to 74% helps raise capital and improve their financial position and business model. Pension funds may invest in IPOs and beat their benchmark index by at least 1% over the long run. Moreover, enhanced performance by pension funds will lead to better returns to NPS subscribers over the long run. However, the PFRDA chief is keeping a close eye on the valuation of startups before allowing pension funds to invest in them. 

You may consider NPS for the twin benefits of retirement planning and tax saving. NPS qualifies for the tax deduction of up to Rs 1.5 lakh per year under Section 80C of the IT Act,1961. Moreover, NPS also offers an additional tax deduction of Rs 50,000 per year under Section 80CCD(1B). In a nutshell, NPS helps you accumulate a corpus for retirement and save taxes. 

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

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