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NPS In The New Tax Regime

With the tax incentives for savings gone if one opts for new tax regime, going for NPS (National Pension Scheme) investments on voluntary basis to the tune of INR 50,000/- per annum or even higher will be out of consideration for many.

Or should it be? While the tax savings during accumulation phase are gone for those who go for new tax regime, key attraction of tax benefits on withdrawal still remain. It has been sometime now that equity investments have become taxable beyond certain minimum threshold of capital gains. However, NPS still offers the opportunity of deploying sizable annual contribution in equity investments and get large part of accumulated corpus (60%) tax free after 60 years of age. This, plus the option of continuing NPS contribution till 75 years of age is what made me subscribe to NPS scheme. The flexibility offered by extending NPS subscription till advanced age of 75 while still having a chance to exit whenever you want to is excellent.  

Coming to annuity part. General refrain is as the annuity rates are quite low. That was my concern too when I subscribed to NPS few years ago. And I was so wrong.

Yes, the rates are low, but only if you buy annuity the wrong way. True meaning of pension – lifelong payment, and nothing once you call it quits from this world. But that is not how most people buy annuity. Popular plans are the ones which offer “Annuity With Return Of Purchase Price”. This essentially means after death of the annuitant, nominee / dependent will get back the initial annuity corpus. The cost of this assurance – lower annuity payments till the time annuitant is alive. Essentially, neither the annuitant nor the annuity provider (insurance company) is taking any risk. No wonder annuity payment rates will be low. What if if you buy annuity the way it is really meant to taken - by opting for annuity without return of purchase price. Yes, there is a risk of going too early and losing large part of your annuity corpus. There is also a chance that you may live quite long and the annuity provider will have to keep paying year after year. That’s what annuity (pension) is all about!!!

Let’s see what the numbers say. Let’s say your NPS annuity corpus once you turn 60 years is INR 25 Lacs. I checked the annuity rates at NPS CRA (https://cra-nsdl.com/CRAOnline/aspQuote.html). These are the highest rates I got for a 60 year old male, single life annuity for life as on 1st August 2025:

-          Option1: With return of purchase price(corpus): 6.75% (INR 14,053/- per month)

-          Option 2: Without return of purchase price: 9.02% (INR 18,799/- per month)

The payment in “risky” without return of purchase price annuity is nearly 5K extra than the safe annuity. That is a sizable sum for somebody who has no other source of income and wants lifelong security of assured regular payments till survival. That’s what pension is all about!!!

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