March 20, 2016

Why not to invest in NPS - excellent article

All tax saving investments have lock-in. But none like NPS.

Consider PPF which has only a seven year lock-in before you can make partial withdrawals, and in 15 years you can make a full withdrawal;

  • EPF – employee contribution can be withdrawn after 2 months of no job; employers contribution can be withdrawn at 58 years of age; (this is a recent change)
  • ELSS or tax saving funds only have a 3 year lock in;
  • Bank FDs for tax savings have a 5 year lock in, so do National Savings Certificates;
  • NPS on the other hand can only be withdrawn at age 60, that too only till 60% of the accumulated value; the rest has to be converted into an annuity that will be received like a pension. And of course, they are taxed too.

Tax on NPS maturity, really?
NPS proceeds are taxable on maturity. Yes, when you finally withdraw that money from your NPS account after turning 60, you will have to pay taxes.

Everyone is selling you the tax benefit on investment but no one is telling you about the the applicable taxes at maturity. This is how the taxation works:


  • 40% of the maturity proceeds can be withdrawn lump sum tax-free.
  • Another 40% (minimum) of the proceeds have to be converted into an annuity which will be taxed as per your income tax bracket.
  • Balance you can either pay tax as per you income tax bracket and withdraw immediately or convert it into an annuity
  • NPS loses me right there. The inflexibility and the complicated taxation puts me off.


Let’s talk about the annuity part of NPS

Read more at http://www.vipinkhandelwal.com/why-am-i-not-investing-in-nps

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