I compare investing in NPS to putting your money behind bars. If this headline sounds like a clickbait to you, wait to hear about your favourite investment, NPS or National Pension Scheme and the bigger bait you are falling for.
Are you investing in NPS?
I have seen all kinds of investors – young and older, investing amateurs and experts, fall for the NPS trap. The tax saving bit is so attractive that they are willing to forgive and ignore every other aspect of the National Pension Scheme.
First, a quick touchdown on the origins.
NPS was introduced in 2004 by the Govt. of India for its own employees. Saddled with rising pension burdens, the Govt took upon it to reduce its liabilities by making the employees contribute for their own retirement.
Before that, the pension used to be ‘defined’ or assured. Now, it became contribution based, that is, you make your own retirement pension pot.
And then gradually, NPS was rolled out to the private sector too. Along with the favourite bait of “save taxes.”
The bait has worked and investors are lapping it up specially the Section 80CCD(1) benefit for Rs. 50,000 investment in NPS.
Unaware of the details or the implication of them, most investors who are investing in NPS are sending their money to life imprisonment.
Investing in NPS is equal to sending your money to life imprisonment.
#1 Behind bars
Once you contribute to NPS, you cannot withdraw your money before age 60.
Not just that, once you get started with your NPS account, you have to keep contributing every year (minimum amount). Else, the account will lapse.
The money is locked in. There are some provisions to help you get some part of your own contribution in case of emergencies. That’s it.
This may be fine if you are a government employee and even fine, if you just want to slug it out in jobs till 60.
But then not everyone, at least several of the investors I work with, plan to work till age 60.
In comparison, your EPF can be withdrawn in entirety (at least for now), if you are unemployed for more than 2 months. Read that again!
You yourself could be one who has done that. Try doing it with NPS.
While, you are happy that something is being invested for ‘retirement’ and you are saving 30% tax too, please remember you are saving tax now, but you have to pay your dues later. More follows.
#2 Tax and withdrawal of NPS
So, you turned 60 with happy dreams about retirement.
But let me wake you up. You cannot withdraw all your money. If you need a lump sum, only 40% of your total NPS corpus can be withdrawn tax free. You can withdraw another 20% of your money, by paying tax at the marginal tax rate.
The remaining 40% has to cumpulsorily be converted into an annuity. So, a part of your money gets bail but the rest stays behind bars.
Imagine a person being let free but only the lower part of the body is released. The fingers of the hands, arms, ears, eyes, head will be released over time, one by one.
All of this annuity is counted as your taxable income. Yes, all the money that has grown over the years will now be taxed at your marginal tax rate.
Annuity products come with their own issues. In fact, annuity, as an investment product today, does not inspire a lot of confidence. You sign up for a product with a constant rate of interest, devoid of what inflation will be. You have no control of your investment portfolio.
With NPS, you also have no choice but to opt for an annuity with one of its enrolled service providers.
Welcome to NPS land!
By the way, if you had any doubt about returns and risk with NPS and if you are making the mistake of double counting your tax benefit, you must read the following notes.
Note 1 – Double counting NPS tax benefit. Too many investors fall for this.
Note 2 – NPS withdrawal, a detail of what we mentioned above.
Note 3 – NPS returns are not assured and there is risk too, in case you thought otherwise.
If you have to pay tax and still take risk to ultimately get market-linked returns, why not do it at your own convenience, flexibility and with choice?
I, for one, am not investing in NPS.
What about you?