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Here are some less-understood facts about the National Pension Scheme (NPS).
- National Pension Scheme comes with no guarantees of returns.
- NPS is mutual fund and carries with it all the risks associated with any old mutual fund. Read more: NPS investments are mutual fund investments!
- The aim of NPS is to generate a corpus and not provide a pension.
- When it is time to withdraw (after age 60), the subscriber should take the corpus generated (40% minimum) and buy an annuity (pension) from any of the designated annuity providers like LIC, SBI, ICICI, HDFC and Star Union. Details here: Annuity Service Providers
- The annuity provider will offer a pension at the annuity rates applicable at the time of purchase. There is no special annuity rate for the NPS, or at least there need not be (and is not at the time of writing)!
- Anyone with a big enough sum can purchase these annuities from the insurers. An NPS account is not necessary! This is point the title conveys. It is not NPS that provides the Pension. The annuity provider does – which they would for any individual whether they are NPS subscribers or not. NPS is only a means to obtain a retirement nest egg. There are other ways to obtain a much more healthier corpus with lot more efficiency.
- NPS is an EET scheme. Meaning the amount you invest is exempt from tax (up to 1.5L under section 80C and 0.5L under 80CC1(B)). The gains made from this investment is exempt from tax as long as you invested. However, 60% of the entire sum – amount invested + gains will be taxed as per slab when you withdraw. These are the current tax rules.
- Therefore, you are only saving 40% tax with NPS, with the rest taxed upon withdrawal! Read more: Do Not Invest Rs. 50,000 in NPS For Saving Tax!
FAQ about the NPS
- Can I open an account to invest only 50,000 under 80CC1(B) and invest elsewhere for 80C deductions? Yes, as long as you open, the govt. will be happy!
- Where can I find information about the returns generated by various pension fund managers? Here: Return of NPS Schemes
- Where can I find portfolio details of each scheme? Here: Portfolio of NPS Schemes (use the menu unde NAV and returns)
- Can I invest online? Yes, but beware of processing charges. Read more (including comments): How to make online contributions to NPS Tier I and Tier II accounts
- Is tier II eligible for tax benefit? Nope.
- How do I estimate the pension I will receive from NPS? You can only estimate the corpus you will receive using any standard SIP calculator. You can then use that corpus to find out pension with current annuity rates (before tax as per slab!) NPS Calculator: How the National Pension Scheme works
- My employer wants me to shift to NPS from EPF. Is it a good idea? In EPF you get the entire corpus tax-free whenever you retire (hopefully well before 60). In NPS you need to annuitize 80% of the corpus if you withdraw before 60! It is a trap! Read more: Stay away from Corporate NPS, if You Wish to Retire ASAP!
With inputs from Facebook group, Asan Ideas for Wealth.
Update 2: NPS: Partial Withdrawal Rules 2016 are just awful! Beware.
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About the Author
M. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.Content Policy
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Prof. Pattu,
My friend is a TN state government employee contributing towards (Contributory Pension Scheme) CPS. Is CPS is same as NPS? how to know equity/debt percentage of CPS portfolio and any ways to change it as per his wishes?
TIA
Rajesh
If s/he joined after 2004 it is probably NPS. Else same as EPF. Gvot employees cannot change equity or debt allocation. Equity allocation is fixed at 15% as of now.
Thank You Prof.
No…TN implemented scheme before 2004 from 1-04-2003 for its employees …rules are similiar to NPS..but not yet implemented NPS architecture under PFRDA
LTCG for equity/equity fund is nil. At the time of withdrawal, NPS is treated as debt fund and taxed accordingly. Am I right?
Even worse! As of now, the entire corpus (including what you invested) will be taxed per slab!!
How about an update especially after tax sops given in the Budget?