Should I Now Switch to the National Pension Scheme (NPS)?

Published: March 3, 2016 at 9:41 am

Last Updated on September 6, 2019 at 11:49 pm

‘In the light of budget 2016 recommendations, should I now switch or shift to the national pension scheme?’ More and more EPF and other pension scheme subscriber are asking this question. While it is clear that we need to wait for the budget recommendations to become a law, here are some important points to keep in mind regardless of what happens from now on.

In his budget speech, the finance minister said,

Exemption is proposed to be provided for one-time portability from a recognised provident fund or superannuation fund to National Pension System.

Therefore, it is clear that the government is keen on making the NPS first choice (if not only choice) regardless of whether EPF taxation is rolled back or not.

The government wants to ensure all types of pension plans, defined benefit  like EPF, and defined contribution like NPS are treated on par upon withdrawal.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

This means that the tax and withdrawal rules will sooner or later be the same.

Should I Now Switch to the National Pension Scheme (NPS)?

1 First ask yourself why you want to? Because of higher returns? If so, why do you think the NPS will provide better returns than the EPF?

If your answer is ‘NPS has equity exposure up to 50%’, excuse me, you are confused and way off the mark.

The EPF is a rock-solid fixed income product. Sure the interest rates can vary, but it is still solid enough. If you wish to switch to the NPS, then the comparison can only be with the fixed income part of the NPS portfolio.

Unfortunately, the NPS is a mutual fund and the EPF a recurring deposit. Mutual fund holdings are marked to market on a daily basis. That is, the value of the holdings and hence the NAV will fluctuate due to the market demand, credit rating changes and interest rate movements.

NPS has three asset classes:

Option G –>  Long-term government bond which can oscillate wildly with interest rates and can take months to recover from a fall. Primary source of gain here is ‘capital gain’ due to price movements.

Option C –> Short-term bonds from banks, corporates and PSUs. They are sensitive to credit rating changes. However, the NPS has a mandate to operate close to a ultra-short term fund and therefore, the risk is minimized. The primary source of gain here is ‘income’ from the bonds. That is the interest payment when the bond is held up to maturity.

Option E –> Nifty Index fund Manoj Nagpal, CEO of Outlook Asia Capital pointed out that this has been changed and it now active management. Will dig up more details on this.

If you must compare EPF with NPS, do so with the option of NPS.

Do not make the mistake of switching from EPF to NPS with 50% equity exposure ‘for better returns’.

2 Prior to the budget, the NPS had mandatory annuity requirements

  • 80% has to be annuitized if withdrawn before age 60
  • 40% has to be annuitized if withdrawn after age 60.

Now the finance bill includes this clause

(12A) any payment from the National Pension System Trust to an employee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of such closure or his opting out of the scheme

This means that I can exit at any time and get 40% tax free and pay tax as per slab on 60%. This is great news for early retirees if made law.

It also implies that the 80% annuity requirement for early exit has been done away with. We need confirmation that the 40% after age 60 is also out.

Once this confirmation is available the NPS (C option only) becomes as a good a product as EPF, but with a small chance of outperformance since it is market linked.

At this point in time, you can ask yourself ‘Should I Now Switch to the NPS?’.

The answer is yes, if you are several years away from retirement. If your retirement is within say 10 years, then I would not recommend it.

The answer is yes, only if the portability rules are crystal clear. Meaning we have a lot of time to not just fine the answer, but even ask the question!

Never forget that the key to sucessful investing is not better returns. It is efficient diversification across asset classes. Switching from EPF to NPS should not skew your asset allocation. Use NPS as a debt product and use stocks or equity mutual funds for equity exposure.

What about the additional 50,000 tax saving under section  80CCD(1B)?

Earlier the corpus created from this was 100% taxable as per slab. Now 40% of such a corpus is tax-free and the rest taxable as per slab. This rule also applies to any contribution made to the NPS whether before April 1st 2016 or after!

Update: Manoj Nagpal is of the opinion that the annuity is not done away with (unless explicity mentioned otherwise)

In which case he points out,

the minimum annuity require is 40% after 60. So at retirement, 60% is withdrawable & 40% of that i.e. 24% is tax-free. Similary before 58, 20% is withdrawable and 40% of that i.e. 8% is tax-free.

If the minium annuity requirements are not modified, I think it is better not to switch to NPS.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)