Why Sumit Shukla of Axis Pension Fund prefers NPS Tier 2
₹55 trillion in assets and traditional NPS tier-1 funds have assets worth Rs1.75 trillion, while NPS tier-2 funds only have Rs5,435 crore under its hood. To be sure, an NPS tier-2 account is similar to NPS tier-1 sans the tax benefits. The only advantage tier-2 accounts have over tier-1 is that holders can redeem the funds anytime.
For now, Shukla is putting a chunk of his savings in tier-2 funds with an aim of switching to the more tax efficient structure of tier-1 as he nears his retirement age. Unlike equity funds that are taxed at 10% of the capital gains (held for more than one year), NPS offers a tax free systematic withdrawal facility of 60% of the corpus from age 60 to 75. Tier-2 account has other things to boast.
It charges a meagre 9 basis points as fund management charge. This is way cheaper compared to the average expense ratio of mutual funds. It also allows subscribers to change fund managers and shift between asset classes such as equity, government bond fund and corporate fund without any additional charges.
“I am getting the average returns of MFs at a much lesser cost," said Shukla, who is the former chief of HDFC pension fund. “The average IRR (internal rate of return) of NPS funds is 12%" Shukla is aiming to build a corpus of Rs5 crore in his NPS account. If he manages to do that, he will be able to withdraw Rs4 lakh every month without touching his principal amount till he turns 75.
This is assuming a 12% return on the account every year. After 75, he can withdraw 60% of the corpus as a lump sum. The remaining 40% has to be compulsorily invested in annuities.
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