William Shakespeare has rightly said ‘what is in a name’. Even when a fund is known as a ‘pension system’, but when its key characteristics are those of an investment scheme such as a mutual fund, it ought to be seen as one.
We are referring to National Pension System — Tier II account. Unlike Tier I account, there is no minimum amount that needs to be invested in Tier II account barring an initial minimum amount of ₹1,000 that needs to be invested.
With this in the backdrop, it is hard to not see Tier II as an investment option but as a retirement fund alone. Just as in a mutual fund, one can diversify their investment across asset classes of equity, government securities, corporate debentures and alternative investment securities.
“There is no doubt that tier II is similar to an investment scheme in many aspects but it differs also in the way that it can’t be started straight away. You have to first start a Tier I account – a proper retirement fund,” said Deepak Aggarwal, a Delhi—based chartered accountant and financial advisor.
Flexibility is the key
When it comes to investing in NPS Tier II account, flexibility is the key. There are three kinds of choices NPS subscribers enjoy. The first one is to decide the mode of investment i.e., active or auto choice. There are three options within auto choice: aggressive (up to 75% equity), moderate (up to 50% equity) and conservative (up to 25% equity).
In active choice, subscribers can decide the ratio of different asset classes whereas in the auto choice — the ratio of different asset classes is pre-determined based on their age and risk appetite.
The second option that the subscribers are given is available only under active choice wherein they can tweak the asset allocation as many as four times in one year. It is vital to note that the flexibility of changing the ratio has recently been raised from two to four.
PFRDA Chairman Supratim Bandyopadhyay announced a week ago that the change of allowing subscribers to tweak ratio four times was made in response to requests from subscribers.
But he cautioned the subscribers that NPS is aimed for the long term and this newly-introduced flexibility of four changes should be used in a prudent manner.
For instance, when total fund’s 60 percent is allocation while the remaining is invested in government securities and corporate debt.
After a few months, if the subscriber wants to take a slightly conservative stance, he can cut down his allocation to equity and increase it in debt.
No cap on withdrawal
Finally, there are seven pension fund managers. Subscribers can choose any of the seven fund managers to manage their NPS funds. One can even change the fund manager once a year.
Just as a mutual fund, one can withdraw money from the tier II account as and when they want. Subscribers can even transfer some of the funds from tier II to tier I, but not the other way round.
However, since there are no caps on withdrawal, investors (er, subscribers) must bear in mind that an investment in Tier II is not eligible for tax benefits.
At the same time, Tier-I account is entitled to a deduction of ₹1.5 lakh under section 80 C of Income Tax (I-T) Act and an additional ₹50,000 under section 80 CCD 1(B).
A government employee — meanwhile — can claim tax benefits of ₹1.5 lakh under Section 80C with a lock-in period of three years for a Tier-II account.