Is NPS really good for investment!!!!
What is NPS? It is National Pension Saving scheme
introduced by govt …. The rules are so complex beyond the understanding of
common man. After communicating many people I got to know they only invest in
this because Govt is sponsoring this …. If at all NPS invests in Stocks since
Govt sponsoring this , so it might be safe and guaranteed to invest in this J ---
Many people thinks, who stay away from mutual funds because it is stock market
dependent :D
Let me tell you NPS will not provide annuity .The aim of NPS is to provide you corpus.you need to
buy one from the insurer’s . The lists
are as here
NPS is not giving you any guaranteed returns like EPF or
PPF.
NPS is like a mutual fund and carries all the risk like a
mutual fund carries.
80% will be
annuitized if you retire before 60 (after Budget 2016, 40% is tax free
withdrawal, 80% of remaining corpus has to be annuitized official confirmation
awaited). This is terribly bad. Do you have any guaranty
to work till 60 in today’s corporate world?
Poor exit option
and liquidity: If you exit before 60 , you need to annuitized 80% . Rest 20% withdraw
is also taxable . OMG! a heavy punishment !!
Other headaches are as below:
- I cannot exit the scheme without practically losing my corpus to an annuity
- I will need to switch only among the fund mangers authorised to manage NPS. As of now, there is no easy way to gauge who is better.
- Although switching is permitted, I will be extremely surprised if this is hassle-free!
- To sum it up, NPS is a prison cell for the serious investor who would like to actively manage ones retirement corpus.
Some people argued like
after 80c , 1.5 lakh it gives addiditional 50,000 tax benefit . . What about utilizing the
"extra" 50,000 limit to invest in NPS. Again, that is not advisable.
The amount at the time of withdrawal is taxable, which makes it not worth
considering. Also, NPS has some detailed provisions on what can be done
to the corpus after you turn 60; how much can be withdrawn as lump-sum and in
what manner, and how much is to be converted to an annuity, etc.
Until
NPS gets into the EEE category, it is better to avoid it entirely.
If someone at the
age of 30 years, invests Rs50,000 for the next 30 years, her NPS corpus at
retirement (age 60), compounded at 10%, would work out to Rs90.47 lakh. Here we
have assumed the equity portfolio returns 12% annually and the fixed income
portfolio will return 8% annually. Hence the weighted return of the portfolio
works out to 10%, as only a maximum of 50% can be invested in equity.(This is
at higher end calculation)
She withdraws
60% of the corpus and invests the remaining 40% in an annuity. The 60% corpus
withdrawn, i.e. Rs54.28 lakh, will be treated as her income and taxed. Assuming
the current highest tax rate, of 30.9%, she will be left with Rs37.51 lakh. The
total value of her corpus at retirement, including the annuity investment,
would be Rs73.70 lakh.
What if she invested
Rs50,000 every year in a top-performing tax-saving equity mutual fund scheme?
The corpus would be worth Rs2.03 crore (assuming a compounded annual return of
14%) and this entire amount would be tax-free. Even if the scheme returned a
moderate rate of 12%, her corpus would be worth Rs1.35 crore, almost double the
corpus created in NPS.
If she invested Rs50,
000 in PPF, the corpus would grow to Rs70.06 lakh with an annual interest of
8.70%. This too would be tax-free. In fact, NPS will turn out to be only marginally
better than PPF, despite the higher risk from the equity portfolio.
Unless withdrawals
are made tax-free on exit and a higher allocation to equity is permitted, NPS
would fail to attract investors. Till then, those looking for higher post-tax
returns will flock to equity-linked savings schemes or mutual fund retirement
plans.
Disclaimer:
I am not a NPS
investor because of its Taxation and withdrawal rules. I may again revisit this
blog if Govt change its pattern from EET to EEE if any case of which
probability is NIL :).This writing has been inspired by Pattu's freefincal and Subramoney'blogs. Also i
did not discuss about the NPS which Govt
employees are getting as a salary deduction instead of EPF.For them 50%
contribution is from Govt. This blog is about personal NPS.
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