India’s own 401K!!
- Rahul Kalra
- Nov 1
- 3 min read
Updated: Nov 2
As I write this there are 2 retirement products in India.
EPF
NPS
While EPF is mandatory for salaried folks, NPS is optional & open to all. But here are the deal- breakers for me.
EPF isn’t all-inclusive (if you're not salaried you're not eligible & only businesses above a certain size are mandated to register for the EPF) & invests only in fixed-income investments. For the tenure that these investments are held that’s a no-brainer. Moreover access to EPF accounts is archaic to say the least.
NPS on the other hand isn’t mandatory. It isn’t widely marketed or bundled into the financial eco-system so as to be a default add-on & the tax & maturity regulations aren’t investor friendly yet.
For a country of 140 cr + to not have one simple retirement product which ticks all the boxes is asking for trouble. The demographic dividend we're sitting on will in the next couple of decades turn the age-tide.
The solution is right before our eyes. But we must do it now. And overnight we'll have our own 401k or superannuation.
Turn the NPS into India’s official retirement product mandatory for all tax-payers & yet also accessible for anyone else. 1 product. Simple to understand. Simple to invest. Simple withdrawal rules. Zero taxation.
A 5-point plan to optimise NPS as a retirement product :
Make the NPS not just mandatory but also inclusive which means all tax-payers irrespective of profession or income or tax-bracket must invest a fixed minimum % of their income every month or year similar to tithing. Keep this mandatory minimum % low but give investors the choice to revise upwards as per their choice. Make it all-encompassing & put it on auto-pilot similar to the MF SIPs or the EPF contributions. So whether you're salaried or a freelance professional or a business owner, everyone mandatorily invests.
Longevity : The NPS must be locked in, not liquid & only available on retirement. Any tokenising or monetisation should only be allowed after a minimum of 20 years of continuous investing without any exceptions for exigency withdrawals.
Let the default Asset-Allocation on the NPS be all equity or build in a simple algorithm tied in to tenure which decides pre-decided AA. For example if tenure to retirement is 20 years++ the AA will be 0-100 (Debt-Equity). 5 to 20 years AA will be 25-75 & below 5 will be 75-25 and so on.
Reach & Branding : Financial Advisors must be certified & onboarded so as to take NPS to the masses like mutual-funds & NPS must be packaged into the financial eco-system from banks to MFs to insurance to salary perks akin to EPF. Get the new-age fintechs onboarded as well. Make it as easy to invest DIY for retirement as it is right now to invest in stocks & mutual-funds. Even AMCs could mainstream it alongwith all their other funds. Give RIAs & PMSs access to it. And for all of this the PFRDA which handles the NPS must not be a babu-run organisation (atleast in spirit). Take it to the point where retirement investing is synonomous with NPS akin to "Have you NPSd yet"?
People love tax-breaks. Even on things that are absolute essentials for their financial security a tax-break gives them that extra prod. It’s just (weird) human nature. In such a case make Taxation the icing on the cake. There must be a separate tax break for NPS in the Income Tax Act over & above section 80(C) & the tax break must be much larger than 1.5 lac. Additionally NPS must have triple tax exempt status. E-E-E which means tax-free on investing, no tax on returns & zero tax on withdrawals.
India is not retirement ready & for the 1st time in our history we will see retirement happening in such large numbers & the distribution phase in the wealth creation graph kick-in. It’s imperative for us to dial-down our very own 401k. Imagine the savings this will mobilise over such long tenures, give India its very own formalised retirement product & Indians a better easier shot at comfortable independent retirement. That makes it a win-win-win.
