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Nine serious limitations in NPS

NPS or National Pension System, as you all know, is the Govt. of India initiated pension scheme that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The funds, in turn, are managed by the Fund Managers approved by PFRDA.

Introduced in 2004 as a mandatory pension plan for the Central Govt. employees, the scheme was opened up for the general public too in 2009.

Unfortunately, however, NPS as it stands today, suffers from many grave drawbacks. 

And because of these shortcomings, NPS investors are at a severe disadvantage to those who opt for other competing investments such as EPF, PPF, Mutual Funds, etc. 

1. Withdrawals at maturity are fully taxable.

2. Withdrawal on premature closure of account too is fully taxable.

3. Pension receivable from Annuity is also taxable.

4. Only up to 60% of the corpus can be withdrawn on maturity. The balance 40% would be compulsorily utilized to buy Annuity.

5. Only 20% corpus would be returned on premature closure. The balance 80% would be  compulsorily utilized to buy Annuity.

6. There is no option for interim part withdrawal from the NPS account. (Some relaxation in this regard is being considered) 

7. Investment in equity is restricted to at most 50% even though equity has amply proven its competence over long term. (Of course, there are 100% debt fund options also available for those averse to equity.)

8. Fixed cost associated with each transaction, makes it very expensive if the investment amount is small. Hence, indirectly it penalizes small-ticket SIPs, which, as we all know, is the ideal way to make investments.

9. You can switch between different fund options only once in a year. This severely restricts your flexibility to move your investments in line with the market opportunities.

In short, High Taxes, Low Liquidity and Limited Flexibility, will not lead you to a financially-happy retirement. Also read 'Pension bill passed. But NPS doesn't get my vote.

Given that there are excellent alternatives to NPS (Read 'Retirement Planning : EPF handsomely beats NPS'), it would be prudent to avoid NPS until these flaws are ironed out.

In fact, as a general rule, ALL kinds of pension plans are avoidable. Why? Read 'Thou shall NOT BUY Pension Plans'.

Since the time I wrote this post, Govt. has amended the guidelines pertaining to 
(a) withdrawal at maturity or in the interim and 
(b) premature closure. 
Read Govt's grip on your NPS money loosens as exit rules are relaxed.

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