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Invest In The National Pension System - Only At Gunpoint

I simply don’t like NPS — the National Pension System.

Simply because… the product-structure of NPS is totally against our interests!

Key flaws with the scheme include:
- High Taxes
- Low Liquidity
- Limited Flexibility

Whereas, other investment alternatives offer:
- Zero (or lower) Taxation
- Better Liquidity
- More Flexibility

Hence, there is simply no reason whatsoever for me to invest in the National Pension System (unless forced at a gunpoint).

A. I have limited access to my own money

On maturity, I can withdraw MAXIMUM 60% of the corpus accumulated.

With the balance 40%, I have to COMPULSORILY buy an Annuity Plan. Such plans pay only the regular pension. The capital invested cannot be touched AT ALL.

Assuming we retire at 60 and live till 80-85, we are talking of around 20-25 years of post-retirement period.

This is too long a time. Anything can happen in these 2 to 3 decades. Maybe we need large sum for our children’s education. Maybe we need money for critical illness in the family. Maybe we move to our hometown and have to buy a house. Maybe we need capital to start a business post-retirement (or forced early retirement, which is becoming common nowadays). Maybe we have moved out of India.

As such, losing access to a part of our capital can become a serious problem.

Whereas I have NO SUCH limitations with various other investment alternatives such as EPF, PPF, Fixed Deposits, Tax Free Bonds, Post Office Schemes, Mutual Funds, etc. We get back the ENTIRE amount on maturity / redemption.

[By the way, you can still buy an (immediate) Annuity Plan when you retire at 60, if it really serves your purpose.]

B. I have to unnecessarily pay tax on withdrawal at maturity

Till recently, the entire 60% amount allowed to be withdrawn was fully taxable. Important point to note is that BOTH principal and returns are taxed. In effect, unlike other investments, under NPS there is no real tax savings... it is mere TAX DEFERMENT.

Thankfully, now only 20% is taxable and the balance 40% is tax exempt.

But, this too is bad.

At maturity, there is NO TAX on withdrawal from EPF (neither principal nor returns). 

At maturity, there is NO TAX on withdrawal from PPF (neither principal nor returns)

At maturity, there is NO TAX on withdrawal from Tax Free Bonds (neither principal nor returns).

After 1 year, there is NO TAX on withdrawal from Equity / Equity Funds. (Update : Concessional Tax on 'returns' only from FY 2018-19 onward.)

After 3 years, there is CONCESSIONAL TAX - on 'returns' only - on withdrawal from Debt Funds.

At maturity, there is NO TAX on withdrawal from Fixed Deposits (only returns are taxed).

Given this, I would be a fool to put my money in National Pension System. I would rather choose from a whole bouquet of nil / low tax investments.
Unless forced at a gunpoint, there is no reason to invest in the NPS.

C. I have to unnecessarily pay tax during retirement

The pension received from the Annuity Plans is taxable. There is no relief on this aspect.

We have to add pension to our total income and pay tax on it as per our income tax slab rate.

Moreover, this monthly pension from Annuity Plans is no great sums. In fact, it is less than even the bank interest. 

Whereas, if this 40% corpus was returned to me, I could have invested the same in (a) tax-friendly and (b) return-friendly options such as PPF, Tax Free Bonds, Debt Mutual Funds (and, if my risk appetite permitted, maybe even equity or balanced mutual funds).

In other words, under National Pension System I am being forced to put my money into a vastly inferior product.

D.  I have too many restrictions on premature closure, or part-withdrawal in the interim

If I have to close my NPS account prematurely, I get back only 20% of the corpus. Balance 80% is locked-in FOR EVER in an Annuity Plan.

ALL other investments will give me back my ENTIRE CORPUS on premature closure. At the most, I may have to pay a small penalty.

And, what if you need money for some key purpose?

Earlier, there was no provision to part-withdraw from National Pension System. Now, this condition has been relaxed. We are now allowed to withdraw a small part of our corpus for children's higher education and marriage, construction of a house and treatment of specified illnesses.

However, we have to comply with too many stiff conditions. Relatively, it is much EASIER to withdraw money — and a lot HIGHER amount — from EPF, PPF and various other investment alternatives.

This limited flexibility, towards one’s own money, is another serious deterrent to consider NPS as a viable investment.

E. Is the tax benefit on 'investment in NPS' really worth it?

One attractive feature  where NPS scores over other options  is the ADDITIONAL tax incentives at the time of investment (not available to other investments). 

These are
a) You can invest additional up to Rs.50,000 (over and above Rs.1.5 lakhs u/s 80C) in NPS and claim tax deduction. 
b) Your employer can contribute up to 10% of your salary in NPS. This money received from the employer is not taxed.

Another attractive feature of NPS is the low costs… and, consequently, higher returns.

However, as discussed, under National Pension System we end up paying too much tax in the future. In all probability, this will be MUCH MORE than what we can save now... both on taxes and costs put together.

[Note: You can also invest in NPS u/s 80C. However, for most people, a large portion of the Rs.1.50 lakhs limit is exhausted through EPF, Home Loan Principal Repaid, children’s Tuition Fees and Insurance Premiums. The shortfall, if any, is best covered with PPF and ELSS. So, NPS is redundant under Sec 80C.]

Concluding:  In two simple words, NPS is an Absolute Disaster.

There are excellent alternatives to National Pension System. Hence, it would be wise to avoid NPS (until all these flaws are ironed out).

Instead, we should build a well-diversified and balanced portfolio of various investment products — such as EPF, PPF, Mutual Funds, Tax Free Bonds, Post Office Schemes, Fixed Deposits and more — and have a more fruitful retired life.

(Note: This discussion, with some minor modifications, applies to other Pension Plans too. Hence, like National Pension System, they too are an ‘absolute disaster’.)

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