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NPS Exit & Withdrawal Rules & Taxation (Latest 2019 2020 – Updated)

The National Pension System (or NPS) is a retirement savings product that allows investors to invest in equity and debt as a means for proper retirement planning. And it is aimed at providing a pension at the time of retirement which usually starts from the age of 60 years.

Many people get attracted to NPS as it gives Rs 50,000 extra tax benefit to its subscribers. But retirement for most young-to-middle aged people is decades away. And NPS is an investment product that requires long term commitment.

So before you chose NPS as a good option for retirement savings, it would be wise to first completely understand how and when you get your money back from NPS. And by getting money back, I mean:

  • When and how you get money back at regular retirement of 60? This is the case of regular Exit from NPS.
  • When and how you get money back if you chose to go for early retirement or wish to exit from NPS much before 60? This is the case of Premature Exit from NPS.
  • What if you need some money for some needs but don’t want to close the NPS? This is the case of Withdrawal from NPS without Exiting.

It should be highlighted here that NPS offers 2 types of accounts – Tier-I and Tier-II. The Tier-I account is mandatory to open if you wish to invest in NPS. This Tier-I account is the primary account for retirement savings and all the rules of exit and withdrawal from NPS are applicable to this Tier-1 account. On the other hand, the Tier-II account can be opened only after the subscriber has opened a Tier-I account and generally, there are no restrictions on withdrawals from the Tier-II account.

Note – If you wish to find out how much money you can save using NPS, then do check this FREE Download Latest NPS Excel Calculator which calculates NPS maturity corpus and NPS Pension in retirement.

Without further delay, let’s find out what are the latest NPS Exit Rules (2020) and the latest NPS Withdrawal Rules (2020).

Latest NPS Exit Rules (2020)

Here are the rules for exit from the National Pension Scheme (NPS)

  • When NPS subscriber reaches the age of 60 (or Superannuation), he will have to mandatorily use at least 40% of the accumulated NPS pension corpus to purchase an annuity (which will give monthly pension). The remaining corpus (60% or lower) can be withdrawn tax-free as a lump sum.
  • If the total accumulated NPS corpus is less than Rs 2 lac, the subscriber can make 100% lumpsum withdrawal.
  • The lump sum withdrawal can be postponed till a subscriber attains the age of 70 years. This rule was made to make it tax-efficient for subscribers to withdraw lump sum (when the old rule was 40% tax-free and 20% taxable lumpsum withdrawal). But since now entire 60% corpus is available for tax-free withdrawal, this option allowing postponement of lumpsum withdrawal is not of much use.

That was about when you exit NPS at the regular age of 60. Now let’s see what are the rules if you wish to exit NPS before you reach 60 (important to know for those who plan to retire at 40 or even a few years before 60):

Latest NPS Premature Exit Rules (2020)

  • If NPS subscriber decides to exit NPS before the age of 60 (like in case of voluntary retirement or early retirement), then he will have to use minimum 80% of the accumulated NPS corpus to purchase the annuity. Only the 20% or less remaining corpus can be withdrawn tax-free as a lump sum.
  • In can of death of NPS before retirement, the nominee can withdraw the full accumulated amount as a lump sum. Though they have the choice to buy any of the annuities being offered if they so desire. In case of the government NPS, 80% of the accumulated corpus has to be used to buy an annuity and the balance is paid out to the nominees as a lump sum.

So now you know that if you do plan to use NPS as a retirement savings product but are exploring early retirement, then you need to remember that you will necessarily have to use 80% of NPS corpus to purchase an annuity.

That was about normal and premature exit from NPS. However, at times you may need to withdraw money from NPS for some important goals or medical or similar contingencies. Right? NPS now has a provision for partial withdrawal subject to few rules. Let’s see what these rules are:

Latest NPS Withdrawal Rules (2020)

NPS withdrawal is different from NPS exit. The NPS withdrawal rules are for cases when the NPS account isn’t closed (as is done in Exit) and only partial withdrawals are made.

These rules are applicable to Partial withdrawal from NPS Tier-1 accounts:

  • Partial withdrawals can only be made from NPS if the Subscriber has had an active NPS account for atleast 3 years.
  • Also, there is a limit on the amount of money that can be partially withdrawn from Tier-I NPS. The limit of withdrawal is up to 25% of only the subscriber’s own contribution (excluding employer’s contribution). Therefore, if both you and your employer are jointly contributing to your NPS account, then the maximum amount that can be withdrawn from your account will be calculated on the basis of the contributions made by you only and exclude your employer’s contributions.
  • The withdrawal can only be made for the clearly-defined expenses like Children’s Higher Education, Children’s Marriage, Construction / Purchase of First House, Treatment of 13 critical illnesses for self, spouse, children and dependent parents and to start a new business venture. And No partial withdrawal will be allowed from the NPS account in any other situations.
  • As for the Tier-II NPS account, there is no such limit or conditions attached on partial withdrawal from it. But the government employees who are claiming deduction under section 80C of the Income Tax Act on the Tier-II account don’t have this flexibility and cannot withdraw money from NPS Tier-II account before 3 years if they have claimed the deduction for tax benefits.
  • Also, there are limits to how many times you can withdraw from NPS. The partial withdrawal, in accordance with above conditions, can happen a maximum of only 3 times during the entire tenure of NPS subscription. No further partial withdrawals will be allowed, once the individual has made three withdrawals. And these withdrawals are exempted from taxes.

As a side note, be reminded that most of the rules and limits on exit and withdrawals are for NPS Tier-I account. If you are a common citizen and have money parked in NPS Tier-II account, then you are free to withdraw as and when you require. But your contributions to NPS Tier 2 Account don’t qualify for tax rebate either. The case is slightly different for NPS contributing government employees. Their contributions to the NPS Tier-II account are eligible for tax deduction under Section 80C up to Rs 1.5 lakh per annum, but there would be a lock-in period of 3 years. The returns on NPS Tier 2 account contributions are taxable at slab rates as applicable to the individuals.

Interestingly, NPS (All Citizens) subscribers can choose not to Exit NPS at age 60 and instead they can if they wish, continue to contribute to NPS account up to the age of 70 to further grow their NPS corpus. Though they can also exit at any point between the age of 60 and 70 by registering a withdrawal request.

The PFRDA’s site has a list of FAQs on NPS Exit and Withdrawals. You can refer to it if you wish to know more about it.

Since NPS is retirement-specific savings product, it goes without saying here that Retirement Planning is a long term goal. And to be honest, you just get one shot at saving properly for retirement. So if you get it wrong, you run the risk of running out of money before dying. And that is a scary situation to be in. So it’s very important to not ignore retirement as you are busy with other goals.

Instead, its best to give retirement the importance it deserves.

Our generation will have a long retirement. And we need to plan for it judiciously. If you need the help of SEBI Registered Retirement Planner, you can check:

Stable Investor’s Retirement Planning Service

 

As for NPS, I hope this post brings clarity about the latest NPS Exit and Withdrawal Rules 2020 that you need to be aware of as NPS investor.

But do understand that when it comes to retirement, products like PPF (How to become PPF Retirement Crorepati) and SIP in good Equity Funds are also good options for saving for your retirement years. And feel free to use this Free NPS Excel Calculator to know how much pension you can get from NPS at retirement.

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Don’t Invest in PMS just because You have Rs 25 lakh

The minimum ticket size for PMS investments is Rs 25 lakhs. But that doesn’t mean that whosoever has Rs 25 lakh to invest should go ahead and invest in PMS.

Let me tell you why.

The Portfolio Management Service or PMS had long been perceived as some sort of exotic investment product, which offered high returns to sophisticated investors.

But what most people forget is that PMS schemes, by design, are high-risk products which are focused on enhancing returns for investors by taking (and not surprisingly) very high concentrated risks at times.

Sometimes it works and results are phenomenal (If you search for the returns delivered by best portfolio management services in India in good years, you will understand how much). But at other times, it doesn’t and the results are horrific. And it is during those bad times that PMS investors experience the obvious-but-often-forgotten downside of high-risk taking.

PMS falls on the higher end of the risk spectrum. And due to its concentrated portfolio and the high inherent risk, it is best suited for investors with prior market knowledge and understanding.

Also, there is a perception that PMS offers a great degree of customization to its investors. And this is considered by many as one of the key benefits of Portfolio Management Services apart from the perception of a high-return-promise. But this isn’t the case for every PMS or for every PMS investor. Most PMS offer standardized model portfolios for smaller clients (those who invest Rs 25-50 lakhs). Once a client is on-boarded, the manager will try to replicate the client portfolio to as close to the model portfolio as possible. But the real customization is available only to the large clients – who can invest atleast a few crores in the PMS. If the client account size is big enough, the PMS manager will give proportionately large attention to the creation of a customized portfolio (broadly in line with PMS model portfolio or strategy if need be) to cater to the client needs. Remember, Such levels of customization is not available for smaller PMS clients.

And as I said earlier, PMS is a high-risk product. Unlike MFs which are tightly regulated by SEBI, the PMS is very less regulated and hence, allows fund managers to take a lot of risks. This can also be seen as extra flexibility available to PMS managers. But this no doubt increases the risk too as the fund manager has a free hand. So for less experienced clients, such a level of risk-taking isn’t even required. 

Let me tell you something interesting.

Have you noticed that – PMS, which were earlier considered only for the rich and the sophisticated, are now being pushed by agents, distributors and banks much more aggressively to everyone capable of sparing Rs 25 lac!

Why is it so?

I will tell you.

SEBI, the regulator has been steadily curbing the commissions on the sale of mutual funds. So the distributors get attracted to the relatively high upfront commissions given to them by PMS operators. So the distributors, in order to protect their income are hard-selling clients to opt for these high-upfront-commission PMS schemes in spite of knowing that they might be unsuitable for them. And they mis-sell PMS schemes by making wrong claims about PMS returns. Read this interesting article on Performance misselling by PMS Distributors.

So now you know why PMS was gaining popularity in recent times.

And it is for the same reason why at times, Mutual Fund Distributors Don’t Give Correct Financial Advice as their commission income depends on they giving not-100%-correct advice. Sounds evil? It is and most people don’t know this. Do read that article.

The regulator has set a minimum investment limit of Rs 25 lakh in PMS to keep it out of reach of very small investors, since the risks are high in PMS (There is chance that this limit may be hiked to Rs 50 lac. I think it’s a step in right direction. Or Maybe bumping it up to Rs 1 crore would be more beneficial indirectly for small investors).

And till the limit is still at Rs 25 lac, please understand that just because you have Rs 25 lac to invest in equity doesn’t mean that you are 100% suited to invest in PMS. Just because you can doesn’t mean you should.

PMS is suitable for high net worth (affluent) HNI and institutional investors with a suitably large investment portfolio. There is no perfect threshold figure here but let’s say that unless you have a few crores to invest, you shouldn’t even think about PMS. That’s why I said that maybe increasing the minimum investment size in PMS to Rs 1 crore would be better (from current Rs 25 lac) 

And since the product is high-risk, its best to keep exposure limited to a small percentage of the overall portfolio if you eventually do invest in it.

So for example – Let’s say your overall portfolio is Rs 10 Cr. Now based on some goal-based analysis, it is found that your ideal asset allocation should be 50:50 equity debt. So that means Rs 5 Cr for equity and the other Rs 5 Cr for debt. Now out of the Rs 5 Cr for equity, it’s best to limit the PMS exposure to 10-20% here for most large and aggressive investors too.

Why?

Because just because you are investing in equity doesn’t mean that you go straight full to the highest risk component. You divide the equity corpus between various levels of risk. Right? That’s how a prudent portfolio is built.

It is also suited for more sophisticated clients having large portfolios who wish to invest in themes that aren’t easily available through mutual fund portfolios. In such cases, the PMS manager can create tailor-made solutions for larger clients.

Is PMS for Me?

Or let’s ask…

Should you include PMS in your portfolio?

I will put this very plainly here.

Based on the little experience I have and things I understand (or atleast feel that I understand…), most Indians are better off NOT investing in PMS. When it comes to equity investing, most are better suited for the Mutual Funds.

To know more, read this detailed article on Differences between PMS Vs Mutual Funds.

And before you leave, here are few points to remember

  • PMS is a high-risk equity product which is suitable for sophisticated investors who know what high-risk concentrated equity portfolio investing really is. PMS is not suitable for small investors.
  • Just because you have Rs 25 lac (minimum required) to invest doesn’t mean that you are suitable to be a PMS investor
  • If your agent, bank is pushing you to buy it then remember that he gets good commission and may not be advising you as per your needs or product suitability.
  • For most of you, it’s better to stick with Goal-based Investing and take the simple and powerful route of Proper Full Financial Planning.

Don’t Be Your Adult Child’s Dip-When-They-Want Emergency Fund

Parents can’t be paying perennially for their adult children’s money mistakes. If they do, how will their children ever grow up financially? Isn’t it?

And helping your children in times of need is fine. But such occurrences should be rare.

I wrote a column on MoneyControl about this. You can read it by clicking below link:

Don’t Be Your Child’s Emergency Fund!

 

Hope you find it interesting.

Why Fee Only Financial Planner is Best For You?

Till now, you have been getting the so-called free advice from your investment agents (more specifically MF distributors, insurance agents and IFAs).

So why am I telling you that ‘Fee-Only Investment Advisor’ or ‘Fee-Only Financial Planner’ better for you?

Because, when you go to a doctor, you want him to give you the right medicine and not those medicines which allow him to earn maximum commission. Right?

The people who sell you Regular Plans of mutual funds (be it MF agent, MF advisor, Robo Advisor or anybody) are basically product sellers. They sell Regular Plans of Mutual Fund schemes which helps them earn commissions.

So if they are product sellers, is it that they may not advise you properly?

Yes, it’s possible.

How ?

Suppose, that a Mutual Fund Distributor decides to sell only 5 schemes which give him following commissions every year:

  • Mutual Fund A – 0.50%
  • Mutual Fund B – 0.75%
  • Mutual Fund C – 1.00%
  • Mutual Fund D – 1.20%
  • Mutual Fund E – 1.50%

As an informed investor, you know that all mutual funds are not the same. And that different mutual funds are suitable for different goals.

So after some analysis, you found that for your real financial goals, Mutual Fund A and B will be the best ones.

If you invest in schemes A and B, how much commission the distributor will get?

He will get 0.50% and 0.75% on your investments.

Now look at it from the perspective of Mutual Fund Distributor, who is a businessman and wants to earn more. He knows that schemes D and E give him more commission (1.25% and 1.50%). So naturally he would want to sell you those schemes.

Isn’t it? He will want to maximize his earnings by selling you higher-commission schemes.

But whether schemes D or E are suitable for you?

The answer is No as you already know (assumed earlier) that A and B are better suited.

And that is the problem.

The advice or recommendations given by the regular-plan selling mutual fund distributors is biased. Biased because they want to earn high commissions. And at times, this earnings-maximization conflicts with what the right investment advice is.

So even when the right funds for you are A and B, chances are very high that the MF distributor will push you to go for schemes C, D and E. He will not tell you why exactly (which is due to high commissions) and instead, try to convince you using redundant and useless arguments.

Whether the schemes the MF distributors sell are suitable for you or not is something that they may not be worried too much about. They will convince you to buy whatever they are selling; and which without a doubt is what offers them the highest commissions.

And you are smart enough to know what is right here and what is wrong.

And let me circle back to the idea of free financial advice which I mentioned in the opening paragraph.

Many feel that these distributors don’t charge anything directly and hence, their financial advice is free. But it isn’t. You are paying for it via commissions and that reduces returns of regular plans that these distributors get you to invest in. And this is the reason that Returns of Regular plans sold by distributor will ALWAYS be LOWER than Direct Plans (I strongly suggest you read article).

They will try to convince you and force-fit all your requirements with the products that they sell. And that is not right. It’s possible that the products or schemes which they are ‘not’ selling may be better suited to you. And they won’t tell you that because they will lose potential commission income then.

To know more, please do read How Mutual Fund Distributors may Give Wrong Advice because of commissions?

And if you are under the impression that your banker has your best interest in heart and is one you can rely on, then please wake up. It is not the case. Be informed that even your Bank Relationship Managers are Just Selling & Not Advising correctly.

It is for these reasons and to ensure that you get the right financial advice, which is conflict-free and suitable for you, it must be ensured that you only take investment advice from SEBI Registered Investment Advisors (SEBI RIA) or SEBI registered Fee-Only Financial Planners.

They are not product sellers (or distribute products) and they do not earn from commissions. Instead, they only earn from the fee paid directly by clients. Since no sale of commission-generating products is involved, the inherent conflict of interest is avoided. This means that the suggestions or advice from SEBI RIA and Fee-Only Financial Planners will be best suited for you and your goals.

It is only after knowing about clients needs, goals, assets, investment capability, risk appetite and risk capacity, etc. that the Fee-Only Financial Planner or RIA will do a detailed analysis, evaluate multiple scenarios and only, then create a proper, well-thought-out financial plan.

It’s obvious that a plain product seller (like mutual fund distributors) will not be deep-diving so much to try and understand your financial life. He will simply try to sell a product (that gives him solid commission) rather than understand your financial needs.

In my view, if you wish to take proper and unbiased financial advice, you should contact SEBI registered Fee-Only Financial Planners. I am a Fee-Only Financial Planner and Investment Advisor myself but there are many others. So if you wish to get in touch with, please use this form. Or if you wish to find an investment advisor near you, then you can also have a look at a list of registered Investment Advisors on SEBI’s site.

Remember, you can be sure of getting the right financial advice from Fee-Only Financial Planners.

Income Tax on Life Insurance Premiums & Maturity in India (Updated 2019-20) – All you need to Know

The real purpose of purchasing life insurance is to avoid tragic stories like this. But many still wrongly feel, that life insurance is a waste of money. But luckily and thanks to our government’s tax-saving policies, they still end up buying some insurance for secondary reasons like using Section 80C tax benefits.

Better something than nothing at all. Right?

Nevertheless, the main purpose of buying life insurance is to financially secure your dependents. The tax benefit on premium paid for a life insurance policy (may it be term plans, traditional moneyback or endowment plans or Ulips) is an important additional advantage of life insurance.

This post details the income tax benefits on insurance plans in India (like income tax benefits on term plans, income tax benefits on endowment plans, income tax benefits on single premium plans, income tax benefits on money back policies, income tax benefits on Ulips).

And please note that we are not just concerned about the Section 80C benefit on insurance premiums you pay year after year. It is also important to focus on whether the maturity benefits of all life insurance policies are tax-free in your hands or not. This is one angle that is often neglected at the time of buying insurance.

Note – Some people have this confusion that the life insurance policy taken from LIC alone will qualify for tax benefits under section 80C and Section 10 (10D). This is incorrect. Tax benefits on life insurance policies are valid irrespective of whether it is purchased from LIC or from any other private insurance company (approved by IRDAI).

So let’s move on and understand various taxation aspects on life insurance policies as per the latest income tax laws in India:

Tax Deductions (on Insurance Premiums) under Section 80C

First question – Are premiums paid on life insurance tax deductible?

The answer is – Yes. You can avail tax benefits on the premiums paid for purchasing/renewing life insurance policies (for self, spouse, children).

Second question – How much life insurance premium is tax deductible?

The life insurance premium paid should not exceed 10% of the sum assured of the policy (where the policy has been issued after 1st April 2012).

What does it mean exactly?

Suppose you purchase life insurance with a cover of Rs 5 lakh (sum assured) with an annual premium of Rs 63,000. In this case, the premium paid (i.e. Rs 63,000) exceeds the 10% limit of sum assured (Rs 50,000 = 10% of Rs 5 lakh). So you will only get a tax deduction on the Rs 50,000 and not on the full Rs 63,000). Any premium in excess of the limit (10% of Sum Assured) will not qualify for tax deduction under section 80C of the Income Tax Act.

Remember, this 10% limit is for policies issued after 1st April 2012.

For policies issued before 1st April 2012, the premium paid should not exceed 20% of the sum assured in order to claim this deduction.

To summarize the tax deductions on premiums paid for life insurance policy under Section 80C:

  • For life insurance purchased before 1st April 2012: The tax deduction is applicable only for the premium which is up to 20% of the sum assured.
  • For life insurance purchased after 1st April 2012: The tax deduction is applicable only for the premium which is up to 10% of the sum assured.
  • Additionally, for insurances issued on or after 1st April 2013 (to a person suffering from disability/ailment), the maximum deduction is up to 15% of the sum assured.

Now you know that it is not necessary that the full life insurance premium you paid will be available as a deduction for tax saving.

One more thing – the life insurance premium paid can be claimed for deduction under section 80C only in the financial year in which it is paid.

That said, whatever be the tax deduction available after the 10% sum assured rule (discussed above), the overall deduction will be limited by the Rs 1.5 lakh limit set for Section 80C of the Income Tax Act, 1961 for maximum tax benefit.

So that was about the tax benefits (deduction) that you get while paying the insurance premiums.

Now let’s discuss what happens on maturity of the policy?

Taxation of Insurance Maturity under Section 10 (10 D)

Most people are blinded by the tax benefits being offered during the premium payment phase. They forget to check whether the maturity amount from their insurance policies will be tax-free or not.

Interestingly, most people have this impression that the maturity proceeds of life insurance policies are fully tax free.

But this is not always the case.

There are certain conditions (scenarios) where the insurance maturity amount is not tax-free. So if you are an insurance holder (endowment, moneyback, etc.), then it is in your best interest to understand the taxation of insurance policy maturity amount under Section 10 (10)D of the Income tax Act.

So what does the Section 10 (10D) of the Income Tax Act, 1961 say?

  • For life insurance purchased before 1st April 2012: If the premium paid exceeds 20% of the sum assured, then the policy maturity proceeds would be taxable in the hands of the insured person.
  • For life insurance purchased after 1st April 2012: If the premium paid exceeds 10% of the sum assured, then the policy maturity proceeds would be taxable in the hands of the insured person.
  • Additionally, for insurances issued on or after 1st April 2013 (to a person suffering from disability/ailment), the above-mentioned limit stands at 15%

So if you were asking are maturity benefits of all life insurance policies tax-free, then now you know that in case the premium paid in any year exceeds 10% (or 20% for policies issued before April 2012) of sum assured, then the whole maturity proceeds would be taxed in the year of receipt.

That was about the maturity proceeds.

But in case of death of the insured person, the death benefit received shall be tax free in the hands of the nominees (even if the premium paid in any year crossed the percentage limit 10% of the sum assured).

Exemption under section 10(10D) on Maturity amount is granted only if the premium paid in any year does not exceed 10% of the sum assured for the policies issued after 1st April 2012 and 20% of sum assured for policies issued before 1st April 2012. That is the main fine print that you should be aware of when planning to buy a life insurance policy.

Section 80C + Section 10 (10D) Life Insurance Taxation

If we combine the limits and details in these two sections, then this is what we get:

If the policy is purchased after 1st April 2012 and premium is more than 10% of the sum assured, then:

  • Only that premium will be eligible for tax deduction under Section 80C which is equal or less than 10% of the sum assured.
  • On maturity, the insurance maturity amount will be taxed as the premium was more than 10% of the sum assured. This is a bigger hit for insurance buyers and comes several years later when its already too late to do anything.

So in your best interest, if you are planning to buy life insurance, do not ignore the tax angle. Make sure that the premium paid is not more than 10% of the total sum assured. Because if you don’t and the premium is more than 10% of sum assured, then only a part of the insurance premium will be tax deductible. If that wasn’t bad enough, the maturity proceeds of the insurance policy will also be taxable at the time of maturity.

If in doubt and if you feel your insurance agent is fooling you, throw your knowledge of the 10% rule of Section 80C and 10(10D) on him. He will be forced to revise his claims if he is lying.

There are various life insurance products like endowment plans, moneyback plans, whole life plans. But the most effective life insurance is Term Insurance. All others mix insurance with investments which results in underinsurance and poor returns on maturity.

I have long advocated that Term Life Plan is the best life insurance option for most people. But also remember that unlike Unit Link Insurance Plan and traditional insurance plans, there is no maturity amount in term plans. Only death benefits.

But nevertheless, whenever you are purchasing insurance, it is important to understand how much of your premiums will get tax deducted and what is the taxability of life insurance maturity payout. Since most people buy insurance as a tax saving & investment product, these important things get overlooked. That said, it’s wrong and you should never purchase a financial product just to save taxes.

So hopefully, you now have a better idea about the taxability and income tax benefits of the Life insurance plans in India.

Investors, Driving at 210+ Kmph can Kill You

Driving fast Investors

I was reading an old article titled False Profits by Jason Zweig here when I felt that it made sense to be shared with the reader here.

So allow me to share parts of the article. I am sure you will understand why I felt like sharing it:

Note – The text in italics is taken exactly from the article.

Everywhere you turn, someone is selling investment hogwash: seductive-sounding ideas that will supposedly enable you to beat the market and buy a tropical island with the proceeds. 

In the past year or so, many investors’ minds have been hijacked by these false beliefs…

More than ever, people think the test of an investment’s validity is whether it “worked.” If they beat Standard & Poor’s 500-stock index over any period, no matter how dumb or dangerous their tactics, people boast they were “right.” But investing successfully over the course of a lifetime has nothing to do with being right in the short term. To reach your long-term financial goals, you must be sustainably and reliably right. While the techniques that are so trendy now – day trading, ignoring diversification, flipping funds, following “systems” – may seem right on a given day, they slash your odds of being right in the long run. 

Imagine that two places are 130 miles (or 210 kms) apart. If I observe the 65-mph (105 kmph) speed limit, I’ll drive this distance in two hours. But if I go 130 mph (or 210 kmph), I can get there in just one hour. If I try this and survive, am I “right”? Should you be tempted to try it too because it “worked”?

The flashy new ideas for beating the market are much the same: In short streaks, if you’re lucky, they will work. Over time, they will get you killed financially.

Let’s keep this post short.

Unless you are professional investor whose sole aim is to maximize returns by taking large risks (which can blow up in the face), you are better off following investment strategy which doesn’t take unnecessary risks and focuses on increasing the odds of reaching your financial goal, i.e. having right amount of money at the right time of your life.

There are several high-risk strategies (like this) that are unsuitable for common people. But greed (and glamour) gets the better of them. Most people are much suited to follow a simple Goal-based Investing philosophy. All else is noise.

By the way, you may ask as to why am reminding you all of the downsides of high-risk strategies (just like driving fast) when your portfolios are already down due to poor returns (and big crashes in non-large-cap space) in the past year or so?

It’s because you won’t listen to me when things are going good. Isn’t it? 😉

Is Employer Group Health Insurance sufficient in India?

When it comes to health insurance, most people have only their employer’s group health insurance coverage in India.

It’s like that the salaried Indians are more content with group health cover which is provided by their employers. As a result, they do not feel the need for any standalone individual health policy.

And this is very common. Most employees in the organized sector are covered by the group health insurance plans in India or medical insurance policy for employees in India.

You may say that health insurance is health insurance whether it is given by the employer or bought by self. But apart from some similarities, there are certain differences between group health insurance and individual health insurance.

Where an employer-based group health insurance is one single policy that covers all the people working in an organization, the individual health insurance plan covers (as the name suggests) only the policyholder (and family if family floater health insurance plan is bought).

Employer-based Health Insurance Plans Vs Individual Health Insurance Plans Or Group vs individual insurance – is a debate that confuses a lot of people.

Nevertheless, health insurance is important and as odd as it may sound, health insurance protects your wealth.

And when it comes to the salaried individuals, the more important question is whether an Employer provided Group Medical Insurance is sufficient or not. Group health insurance plans in India are many and vary from employer to employer. But whether the plan on offer is good enough or not is something that should be seriously considered.

Now before we get to why depending solely on employer’s group health insurance coverage isn’t a very good idea, let’s first take a brief look at some of the differences between the group cover and the personal individual health cover:

  • Waiting Periods – The individual health insurance begins after the waiting period is over. Waiting periods start from 30 days for the policy to be effective and go up to several months (years) in case of specific diseases/treatments. Group health insurance, on the other hand, has practically no waiting period. Coverage begins from day 1.
  • Validity of Insurance – The individual policies are valid for as long as the premium is paid (and policy is renewed) by the policyholder. The employer-sponsored group health insurance is valid until the employer employs the person.
  • Medical Checkup – Generally, there is no requirement of undergoing a medical checkup (for self and family members) under the employer’s group health insurance. So if you are looking for health insurance without medical check-up in India, then that’s your answer. But checkup may be needed for individual health insurance plans.
  • Insurance Cover Amount – In the individual cover, the policyholder can choose whatever cover he wishes to pay the premium for. But this flexibility isn’t available with employer-sponsored health plans where the employer decides the coverage amount and whether to increase or decrease it as per their discretion.
  • Tax Benefits (under Section 80D) – For the individual health plans, the tax benefits accrue to the policyholder under section 80D of the Income Tax Act,1961 (read about latest health insurance tax benefits). But there are no tax benefits for employees who are covered under the Employer’s Health Plans. But if the employee pays a part of group insurance premiums, then that part can be claimed under tax deduction limits of the individual employee. That is all to taxability of health insurance premiums paid by the employer that there is in India.

Atleast some of these points will make the employer-provided group health insurance plans attractive to the employees. And you may feel that it is better to get health insurance through your job.

That is true to an extent. Getting under the coverage of group medical insurance plans in India is no doubt better than not being insured any day.

But as I said earlier too, the question after a while will be whether it is wise to depend solely on the employer for your health insurance needs?

The answer is that it isn’t.

Let’s see why:

  1. Sum Insured (coverage) may be Insufficient – The sum insured provided by the employer’s health plan may be insufficient. Suppose the cover provided is just Rs 3 lakh. Is it enough for a family of four? No. So one should check whether the cover provided is sufficient or not for individual needs. Who knows multiple people of one family may require hospitalization in a year. Then what? The employer’s cover will get exhausted quickly and may be insufficient. In group health plans, one cannot change the coverage amount depending upon personal requirements (though some employers may allow for it by paying additional premiums)
  2. Negative Policy Changes at Workplace – What would you do if for some reason (like cost-cutting, etc.), the employer decides to do away with health insurance or reduce the coverage substantially? It is not in your hand and employer is the boss. You will be left unprotected and underinsured.
  3. Cover during/after Job Switch – You already know that employer-provided insurance cover is valid only till one is employed with the employer. In case of a job switch with a gap in between, the person will be unprotected. Also, there is no guarantee that the next employer will necessarily have a group employer-provided health insurance plan for employees.
  4. As an extension of the previous point, if you are covered only by your employer’s health coverage and are planning to quit your job and go out on your own, then better take an individual health cover much before you make the transition.
  5. At times, group health cover may have clauses like co-pay and deductibles that the employee would be required to pay in case of making a claim. This is not the case in most individual covers for young-to-middle-aged individuals.
  6. Who will insure health after Retirement – If you are nearing retirement and still only have group health cover, then you will be left with no health cover after retirement from the job. This is dangerous as medical expenses after retirement can be huge. So one should make sure to have an independent individual health insurance policy much earlier than retirement. This is to first ensure that all the waiting periods are exhausted much before the retirement begins and also to cover the risk of being denied fresh purchase of health insurance during old age due to future health issues (if any).

All said and done, employer-provided group health insurance plans in India have decent benefits to begin with. But their inherent limitations and lack of flexibility make it necessary for people to not rely solely on them. You have broadly understood how group vs individual insurance differ.

So if you really want to have more independence when it comes to health coverage, then it’s better to have a personal health insurance plan according to your unique needs.

This way, you will also not depend on the employer’s whims and fancies and be protected in future too (if job switch or loss makes you uninsured temporarily).

Now you make ask how much health insurance cover should you buy?

There is no one answer that fits everyone here.

  • But looking at rising costs of hospitalization and increasing frequency of lifestyle diseases, taking atleast a cover of Rs 7-10 lakh is advisable. Ofcourse, premium affordability is one factor that will be considered. But this is a good target to begin with.
  • In addition to your coverage under the company’s group medical insurance plan in India, go ahead and purchase a standard health insurance policy.
  • In the case of hospitalization, first, use your employer’s cover. If bills are more, then make use of the personal health insurance (assuming it is bigger than the company provided one)
  • When it seems that the coverage isn’t big enough for future health risks, go for super top-up health insurance. What is that? In brief, the super top-up policies kick in after a threshold. Suppose your base cover is of Rs 5 lakh. And you take super top-up insurance of Rs 15 lakh. Then the bills between Rs 5 lakh and Rs 15 lakh will be settled by your top-up plan as threshold kicks in at Rs 5 lakh. Super top-up health covers are cheaper than base plans as they provide coverage only after a certain limit as explained above.
  • Also, it might seem like a waste of money but try to buy personal health insurance as early as possible. That way, your starting premiums will be low and you will not be denied policy purchase later on (which may be the case in later years when health isn’t so good).

Please don’t think that I am against group health insurance plans in India. In fact, it’s an extremely good benefit for young earners who do not know the importance of health insurance. So if you ask me Can I buy health insurance if my employer offers it? The answer is Yes! Go ahead.

But in due course of time, understand the Iimitation of such covers and buy a personal health plan as well.

I hope it’s now clear why you cannot rely only on group health insurance cover provided by your Employer and why the Employer-provided Health Insurance is not enough. Though both seem same, there are indeed subtle fundamental differences in group health insurance vs individual health insurance policy in India.

So don’t tell me that I have group health cover from the employer. I don’t need a personal health insurance plan.

Health insurance is necessary for everyone. I would advise all of you reading this post to purchase a personal (family) health insurance cover apart from what you already have from employer-provided group cover. That way, you will not depend 100% on your employer’s health insurance.

A Portrait of the Crore (Quoted in OPEN Magazine)

Recently, I got quoted a few times in a magazine named ‘Open’ in their Wealth Special Issue 2019.

The article was titled A Portrait of the Crore. And you can read it using the below link:

A Portrait of the Crore

 

Portrait 1 Crore - Dev Ashish
Image Source – Article in Open Magazine

The calculations referred to in this published article are from a post I wrote sometime back – Can you Retire with Rs 1 Crore in India today?