NPS Investment: Why Exit Barrier is the Biggest Positive Feature, According to Sriram Iyer of HDFC Pension

The National Pension System (NPS) is increasingly gaining traction as a robust retirement investment vehicle in India. Despite its growing popularity, it still faces hurdles in becoming the go-to choice for private sector investors, primarily due to its perceived lack of liquidity.

However, this so-called drawback might actually be its strongest feature. Sriram Iyer, CEO of HDFC Pension, explains why the exit barrier in NPS is beneficial for investors.

The Exit Barrier: A Blessing in Disguise

Long-Term Investment Discipline

One of the main concerns for potential NPS investors is that their funds will remain locked until retirement, limiting access to liquidity. Sriram Iyer argues that this feature ensures the funds are used for their intended purpose—retirement savings.

By restricting premature withdrawals, the NPS fosters a disciplined approach to long-term investing, allowing the corpus to grow significantly over time.

For instance, mutual funds launched 25 years ago have delivered compounded annual returns of over 22%. However, less than 5% of investors have stayed invested long enough to reap these benefits. Often, those who did either forgot about their investments or passed away, indicating that active investors tend to miss out on substantial wealth accumulation.

The NPS's exit barrier, thus, encourages investors to remain committed to their retirement savings, ultimately working in their favor.

Communicating the Benefits

Despite its advantages, the NPS has struggled to convey its long-term benefits effectively. One of the key incentives for investors is the tax benefits offered by the NPS. For example, corporate NPS provides significant tax breaks, enhancing investment growth.

Starting with 42.8% more units on day one compared to a market-linked product underscores the power of tax incentives within the NPS framework.

Ensuring Funds Stay Invested

The NPS exit barrier ensures that investments are not prematurely liquidated for short-term needs, which is a common issue with other financial instruments. By mandating that 40% of the corpus must be used to purchase an annuity, the NPS guarantees a regular income stream during retirement.

This financial security is crucial for managing post-retirement expenses and maintaining a stable lifestyle.

Tax Efficiency

NPS offers substantial tax benefits, making it an attractive option for long-term savings. Contributions up to ₹1.5 lakh qualify for tax deduction under Section 80C, with an additional ₹50,000 deduction available under Section 80CCD(1B).

Upon retirement, the lump sum withdrawal of 60% is tax-free, while the annuity income is taxed according to the individual's tax slab, often benefiting retirees who fall into lower tax brackets.

Key Features of NPS

• Regulated by PFRDA: Ensures transparency and adherence to norms.
• Voluntary Participation: Open to all Indian citizens on a voluntary basis.
• Flexible Investment Options: Allows investors to choose their investment pattern and fund manager.
• Low Cost: One of the lowest-cost pension products available.
• Portability: The account remains the same irrespective of job changes or relocations.
• Tax Benefits: Offers tax benefits under Section 80C and Section 80CCD(1B).

NPS Withdrawal Rules

Before Retirement

• Partial Withdrawals: Allowed after 10 years for specific purposes like higher education, marriage of children, buying or building a house, and medical treatment of critical illnesses. These withdrawals are capped at 25% of the contributions made by the subscriber.
• Complete Withdrawal: Permitted in case of critical illness or if the accumulated corpus is less than ₹2 lakh, in which case the subscriber can opt for a full withdrawal without purchasing an annuity.

On Retirement

• 60% Lump Sum: Tax-free and can be withdrawn at the age of 60.
• 40% Annuity: Mandatory purchase to ensure a regular pension. The choice of annuity service provider and type of annuity lies with the subscriber, offering flexibility based on individual needs and preferences.

Annuity Options and Providers

Investors can choose from various annuity service providers (ASPs) empaneled with PFRDA. HDFC Life, SBI Life, ICICI Prudential, and LIC are some of the leading ASPs offering diverse annuity plans tailored to meet different financial requirements post-retirement.

These plans provide options for monthly, quarterly, half-yearly, or annual payouts, and some even offer a lump sum payout for major expenses.

Important Summary

Feature	Details
Regulation	Regulated by the Pension Fund Regulatory and Development Authority (PFRDA) for transparency and adherence to norms.
Participation	Voluntary participation available for all Indian citizens aged 18 to 65 years.
Investment Options	Flexible investment choices across equity, corporate bonds, government securities, and alternative assets.
Cost	One of the lowest-cost pension products available in the market.
Portability	Account remains the same regardless of changes in employment or location.
Tax Benefits	Deductions under Section 80C and additional ₹50,000 under Section 80CCD(1B).
Exit Barrier Benefits	Ensures funds remain invested long-term, reducing premature withdrawals and encouraging disciplined savings.
Withdrawal Rules Before Retirement	Partial withdrawals allowed after 10 years for specific purposes (education, marriage, home purchase, medical treatment).
Withdrawal Rules on Retirement	60% lump sum tax-free withdrawal; 40% mandatory annuity purchase for regular income.
Annuity Providers	Choices include HDFC Life, SBI Life, ICICI Prudential, and LIC, offering various payout options.
Communication of Benefits	Emphasizes long-term growth potential and substantial returns through disciplined investment.
Annuity Purchase	Mandatory 40% annuity purchase ensures a steady income stream during retirement.
Long-term Investment Discipline	Promotes staying invested long-term, leveraging the power of compounding for wealth accumulation.