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What is NPS ?
I personally don’t use it but I googled a bit to get you an idea.
The National Pension System (NPS) is a social security initiative by the Central Government. Its a sort of pension scheme with decent 8-10% annualised returns, not guaranteed and works more like a mutual fund that’s linked to market performance.
It comes with two tiers and here’s what I know:
- Tier 1: This is the actual NPS a/c meant for tax benefits but also comes with a lock-in period and exit (withdrawal) rules. Bit complicated than those FD with tax benefits and so you get slightly higher returns on it.
- Tier 2: Its more like an open-ended mutual fund without any exit rules and there is no tax benefit on it either. You need to have Tier 1 a/c to open a Tier 2 ac.
So as you see Tier 1 is what once should ideally invest in if one plans for a long term.
But for those who want to invest for a short term Tier 2 is what comes handy.
Credit Cards for NPS payments
Now comes the juicy part!
NPS payment system allows you to invest through credit cards among other payment options. Technically one is not allowed to use a loan product (like credit cards) for investment purpose of any sort.
But well, government decided to allow it as it will encourage more people to opt for it. Good move by the digitally inclined government (nope, no political views!).
NPS Payment Gateway Charges
|Credit Card||0.90% + 18% GST (1.062%)|
|Debit Card||0.80% + 18% GST (0.944%)|
|Net Banking||INR 0.60 + 18% GST|
So if you intend to invest using credit card, you may do so by paying the above ~1% transaction fee, which in my opinion is very attractive.
High Value NPS Payments
While we’re allowed to pay NPS payments without a limit as such, it doesn’t mean we can spend in millions and get away with reward points.
Well, actually you can do that if your income is that high!
But the problem comes only when people start to misuse the system by investing, withdrawing & then re-investing the same amount again in a short period to gain rewards.
That’s called manufactured spend in the dictionary of credit card maximisers.
Recently many credit card issuers, especially Amex & HDFC started taking various actions on accounts with such suspicious activity of high value NPS spends. Here’s what we know so far:
- American Express: Looking at the reports from multiple readers it seems Amex started blocking cards and closing few accounts altogether. Some do get warnings, requesting for more details about such transactions.
- HDFC Bank: HDFC is usually known for debiting points on high value transactions and its nothing new when it comes to NPS issue. So in NPS case too HDFC debited points on many such risky accounts and some got temporary/permanent account block too.
Other banks could also be doing it, or maybe they will do it going forward.
Overall I see the actions taken by banks are directly proportional to the volume one dealt with. If they see someone spending ~1Cr like this, the impact could be severe like account block compared to someone who spent 1L in a year.
Why banks do it?
Partly a business move, partly a legal move!
Manufactured spend is a grey area but the same also falls under money laundering, which is illegal stuff.
Bank’s are supposed to take actions to prevent these activities as they have to abide by the anti-money laundering act and this is one of the ways to prevent it.
Moreover, if many do it in large numbers in long run it also generates fake numbers on consumer spend behaviour and overall affects the entire cards ecosystem.
However, if you ask “Is it fair for banks to do this?“
Nope! Bank’s risk team will be very much aware of such activities in advance. So its unfair to let cardholders play and block them later.
Rather, it would be better if banks have a flagging system that warns users in realtime when they pass a certain spend limit instead of letting them transact and catch them all at once.
I used my credit card for NPS payment, is my a/c at risk?
As long as you didn’t game the system, you have nothing to worry. If you have used the system for small amount to reach the milestones, it maybe OKAY, but high value transactions will be under the radar.
What can I do if the credit card issuer debited points or closed the ac?
As this is usually done as a bulk activity, you might fall into the net even if you don’t game the system, esp. if your transactions are high.
In such cases, you may appeal/escalate to respective credit card issuer with the documents. Your ac may get re-instated if the bank is fine with the appeal. It may vary from case to case based on previous spend history, etc.
Manufactured spend opportunities show up every now and then but its important to remember that all those will eventually lead to a trap if too many users try to take advantage of it, especially with high value transactions.
So not only NPS, even if you come across other opportunities in future to earn points via manufactured spend its better not to play too much with it.
That aside, if you intend to really invest in NPS Tier-II for a decent period of time for its returns, you may do so with your credit card and continue to get the rewards. Even if your intentions are good, its safer to use multiple cards if you intend to invest relatively high amount.
Have you been affected recently due to NPS payments? Feel free to share your experiences in the comments below.
P.S. God’s maybe watching, so feel free to use your Dog’s name if you intend to dwelve into details.