Mint BFSI Summit | HDFC Pension’s Sriram Iyer busts five NPS myths

Although Indians are increasingly adopting financial assets like stocks and mutual funds, they still have to go a long way in terms of prudent retirement planning, believes Sriram Iyer, the chief executive of HDFC Pension Management.

Speaking at the 17th edition of Mint Annual BFSI Summit on Friday, he said that while financialization kept pace over the past five years, financial planning hasn’t. “Retirement planning is something that has taken a backseat,” he added.

Talking about retirement instruments, he said the National Pension System (NPS) is one of the most underrated products in financial planning. 

Here are the five myths people have about the NPS, according to him: 

NPS delivers middling returns

Though many people feel the NPS gives middling returns, Iyer said that in reality, the equity scheme under the NPS gives even better returns than average large-cap funds. 

In terms of performance, he said that the NPS’s corporate funds and government bond funds have also delivered over 7.5% over the long term.

He said this combined with the tax benefits on investment and zero capital gains on maturity, the NPS makes for an attractive proposition. “It’s a low-cost, high-return product.”

The NPS has limited tax benefits

Many people think the NPS has limited tax benefits. Iyer said there are three stages of tax exemption. 

He said the most powerful benefit is that under the new tax regime, individuals can claim up to 14% of basic pay plus dearness allowance if invested in the NPS. 

He added that this was the only deduction available under the new tax regime. “There are no other deductions in the new tax regime.”

Under the old tax regime, there is a separate ₹50,000 deduction for the NPS under Section 80CCD(1B) if the ₹1.5 lakh Section 80C limit was exhausted. 

He clarified that while interest accrued on Employee Pension Scheme contributions above ₹2.5 lakh every year is taxable, there’s no such tax on NPS gains.  

Most importantly, he said, unlike mutual funds, there’s no capital gain tax on the lumpsum withdrawal from the NPS at maturity. 

NPS=No flexibility

Iyer said the NPS subscribers can change their pension fund manager and investment options for any asset class.

The minimum contribution requirement is also a mere ₹1,000 per year. 

He also said subscribers can tweak their asset allocation or opt for automatic rebalancing as per their age through the lifecycle fund. 

The NPS offers a smooth portability process in case of job changes.

NPS is illiquid

Regarding the NPS’s restriction on full withdrawal until the age of 60, he said the illiquid nature works in favour of subscribers, as they tend to hold onto their investments for the long term.

“I keep hearing the NPS is illiquid, and there lies the opportunity to make more returns. If you could exit the product anytime you want, you would end up doing that and compromising returns.”

An annuity should not be mandatory

He addressed the concerns on compulsory annualization of 40% of corpus on maturity. He said people need to realize that there are no other products that can guarantee a fixed rate of return for a lifetime. “Optically, returns may sound lower, but the reality is that 20 years from now, you will get the same rate of returns as on the sign-up date.”