- Editor Rating
- Rated 3 stars
- National Pension System (NPS)
- Reviewed by:
- Published on:
- Last modified:
- Product IdeaEditor: 50%
- Fund HouseEditor: 100%
- Fund ManagerEditor: 50%
- PerformanceEditor: 50%
- ConsistencyEditor: 50%
- RiskEditor: 50%
- Expense RatioEditor: 100%
All the commercials about varied financial products are aired/printed with a disclaimer which asks investors to carefully read all the offer documents before putting their money in it. There are specific reasons for this disclaimer. One of the financial products that individuals readily put their money into without giving second thoughts is the NPS or National Pension System. This scheme offers very attractive tax saving options and hence investors chose to ignore all other shortcomings.
NPS has a long lock-in period
NPS offers an extra INR 50,000 deduction under Section 80 CCD (1b) which draws in lots of investors. However, most people are not aware of the fact that once the money is put into NPS, it cannot be withdrawn before the investor turns 60 years of age. Such a long lock-in period may work for government employees and/or those people who are willing to work till they are 60 years old. NPS does have a clause for emergency withdrawals, but it can be availed only under special situations.
NPS has a clause for mandatory contribution
All investors in NPS have to make a compulsory deposit of a minimum sum every year. This is a really good way to save and NPS also offers tax savings of 20 to 30 percent on such saved amount. It may however be noted that the product only defers the amount that will be taxed. Investors will need to pay tax on a later date when it is time for you to withdraw the corpus.
The huge negative of taxation
When the lock-in period is over and you wish to withdraw the money, only 40 percent of the NPS corpus money can be taken out as tax free. The investor will have to pay a marginal tax rate when withdrawing another 20 percent of the total corpus. The rest of the 40 percent has to be mandatory put into an annuity to get a pension every month. This annuity is also fully open to taxation. Also, investors do not get any benefit of long term capital gains or indexation.
Compulsory Investment in Annuity Plan after Maturity
Investors in NPS are forced to contribute a minimum of 40 percent of the total corpus into an annuity plan of an Insurance company at the time of maturity. Additionally, investors have to select an annuity from only between any of the service providers enrolled with NPS. The annuity plans are not transparent and not best of investment. They are also fully taxable.
Final Verdict – Don’t invest in NPS.
Long Time Horizon
Forced Purchase of Annuity
Full Equity Exposure not allowed