I have been asked by many senior citizens and people close to their Download Circular).
NPS Rules relevant to Senior Citizens
If you read through the circular there are few things which are important to note from the perspective of senior citizens:
- Anyone up to 65 years age can open NPS account
- Investment up to Rs 50,000 in NPS Tier 1 is eligible for Normal Exit Rule: The subscriber can exit the NPS after completion of 3 years. In this case they can withdraw maximum of 60% as lumpsum and remaining 40% has to be used to buy annuity, which would pay a monthly pension. However if the amount is less than Rs 2 Lakhs, the subscriber has the option to withdraw 100% as lumpsum without buying annuity.
- Premature Exit Rule: In case the exit from NPS happens before completion of 3 years, it would be termed as Premature exit. In this case subscriber can withdraw maximum of 20% as lumpsum and remaining 80% has to be used to buy annuity. However if the amount is less than 1 lakh, the subscriber has the option to withdraw 100% as lumpsum without buying annuity.
- In case of Death of Subscriber: The entire amount is paid to nominee of the subscriber.
Also Read: NPS – Maturity, Partial Withdrawal & Early Exit Rules
Should Senior Citizens invest in NPS?
Also Read: 11 Investments to get Monthly Income in India
Senior Citizens’ NPS Strategy
Senior citizens planning to get NPS account should invest Rs 50,000 in their Tier 1 account. This would give them Income Tax benefit continues for years to come and you are still in higher
At the end of 3 years you would have contributed Rs 1,50,000 (Rs 50,000 for 3 years) and assuming returns of 8% you would have Rs 1.75 lakhs. At this time (end of 3 years) you can either exit or wait for a year without contributing. The idea is to have final corpus less than Rs 2 Lakhs. You would be able to withdraw 100% amount but only 60% is Income Tax rate.
This strategy works best for people who are close to Income Tax slab is going to come down in next 3-4 years.
Also Read: Senior Citizens’ Savings Scheme: Excellent Investment for Senior Citizens
What could be the pitfalls?
There could be somethings you should be careful about:
- The Opening of NPS account is very easy can be done completely online. But the withdrawal process is not very streamlined yet and you may have to do a bit of running around/follow-up when doing so.
- Investing in NPS makes sense only if you are in higher Income Tax slab, you would be saving Rs 31,200 in 3 years in taxes. This would go up to Rs 46,800 for people in 30% Do remember on withdrawal, if you do not buy annuity the 40% of NPS corpus would be added to your income and taxed accordingly. In case you are in higher Income Tax.
So Is NPS good investment for senior citizens? The answer is Yes only if you are investing to save Income Tax bracket right now and think that while withdrawing the NPS maturity amount you would be in lower Income Tax.