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Tax-Free NPS Withdrawal Hiked To 60%. But Don't Say Wow.

As per the present rules of NPS (National Pension System),
- On maturity, you can withdraw 60% of the total corpus
- Of this, 40% is exempt from tax and 20% is taxable
- With the balance 40% corpus you have to compulsorily buy an Annuity Plan
- Pension received from this Annuity Plan is taxable

New rules, to be applicable from April 1, 2019, stipulate that
- On maturity the maximum corpus that you can withdraw remains at 60%
- This entire 60% will now be tax-free
- The condition to compulsorily buy Annuity with balance 40% is unchanged
- Also, the pension from Annuity Plan continues to be taxable.

Unfortunately, this additional 20% tax-free sweetener is nothing to celebrate.

The NPS Scheme continues to suffer from serious issues. These were discussed quite elaborately in my blog post Invest In The National Pension System - Only At Gunpoint.

That's why I won't change my recommendation — you should avoid investing in the NPS Scheme.

Key drawbacks of the NPS are summarized below:

1. You can't touch 40% of your money
The condition, that you can withdraw maximum 60% of the accumulated corpus, remains unchanged.

In other words, the balance 40% of your money is not accessible to you at all. Whatever may be the emergency, a large part of your corpus, is locked-in forever in an Annuity Plan.

Anything can happen during the 20-25 years from the time you retire at 60 till the average life expectancy of 80-85.

This 40% is not a small amount. As such, not being able to withdraw any amount from the same, can turn out to be a very serious issue.

Since the alternatives (such as EPF, PPF, Debt Mutual Funds, Tax-Free Bonds, FDs etc.) do not suffer from any such lock-in problem, they become the obvious choice... and not the NPS.

It's a thumbs down for the NPS (National Pension System) 

2. Pension is taxable
The condition, that the pension received from Annuity Plan is taxable, remains unchanged.

Plus, the monthly pension from a typical Annuity Plan will in all probability be less than even the bank fixed deposit interest.

Whereas, if you had access to this 40%, you could always choose investments that
(a) not only gave better returns,
(b) but were also more tax-efficient. 

This is possible only if you skip the NPS and stick to the alternatives mentioned above.

3. Premature exit is disastrous
You are doomed if for some reason you have to exit from the NPS before maturity. And this risk is quite real because we are talking of a time period spanning almost 30-35 years (say from age 25-30 till the retirement at 60).

Only 20% of the corpus would be returned to you.

The balance 80% will perforce be invested in an Annuity Plan. And, we have discussed earlier the drawbacks of an Annuity Plan.

So, on premature closure, you get back a measly 1/5th of your corpus and a big 4/5th chunk is locked-in forever in a poor investment.

Instead, you will get back the entire amount on early withdrawal from the alternatives i.e. EPF, PPF, FDs, Debt Funds etc. At best, you may have to pay a nominal penalty. 

Again, the alternative investments are far (far) superior to the NPS.

Of course, the only advantage that NPS enjoys over other investments is (a) the additional tax break of Rs.50,000 and (b) tax-free salary up to 10% if your employer contributes the same to your NPS Account.  

However, given the many serious disadvantages, this is only a minor relief.

Hence, I repeat what I stated in my earlier bog post : NPS is an Absolute Disaster.

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