When the NPS was launched I was one of those who said ‘let us wait to see it operate’. I am happy that I did not open an NPS account. Really thankful for the wait.

From a real cost of .0009 to 0.25% – is a huge jump – of almost 300%. Not fair. I am happy to note that this jump came so soon…and I did not have to wait too long to see this bad news. I can say in hindsight that I was always expecting it!

0.25% is a low figure but there are private sector amcs which have index funds at this price. One fund that I have seen is IDFC index fund. So if you do a SIP in Idfc index fund you should be able to get the same benefit of being in a NPS.

What will you do with the debt portion?

Well I am against MF debt investment -EXCEPT FOR deferring your tax and tax arbitrage. So if you have about say Rs. 3 lakh per annum, put Rs.1L in PPF and Rs. 2L in Idfc index fund. This combination will surely beat the NPS.

How much can you put in PPF? This is a little tricky now – but Rs. 2 lakhs between husband and wife should not be a problem. Then you have 2 minor children and a HUF….so that is also not an issue.

The only spanner in the works is if the government introduces a separate deduction of say Rs. 3L over and above the 80C. My educated guess is even if such a provision is made, it will include the PPF. So presumably the limit in PPF will be raised accordingly. For your 80C use your home loan repayment, insurance premium, children school fees, provident fund, etc. and for this new section use your PPF, and the balance goes to the IDFC index fund. Simple.

Also the NPS comes with a huge lock in…which suave customers may  not need.

So NPS, Sayonara. Auf Weidersehn!

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  1. Minor children + parent = total 1,00,000 in PPF
    HUF not allowed to open HUF account in PPF or continue beyond 15 yrs in existing PPF
    Taxfee bonds an interesting option ?

  2. The NPS does not make sense even today because the maturity amount is not taxfree, so Equity funds/Superannuation funds anyway beat the hell out of NPS even today,
    The only benefit even after adjusting for tax was the Account II of NPS due to low cost of operation which as you say has been lost, In any case the Type I account was worthless due to lock in.

    The only question is weather NPS Type II account is better than the performance of good Balanced funds in market with direct plans, we will know over next 1-2 years.

  3. why tax free bonds? a bond fund with long duration seeking absolute returns instead of relative returns…growth plan..whenever u waithdraw pay cap gains tax…still better than tax free….

  4. Actually, there are other factors too.

    You should compare NPS against EPF. It isn’t the interest rate, it is just that EPF is too cumbersome, if you shift jobs the transfers don’t happen easily etc. And govt fixes the interest rates – it is high right now, but may not be later. And because some of it (though only 50%) is in equities, NPS has potential to yield more over a greater period.

    Then, we come to disadvantages of NPS.
    The equity proportion is capped and can’t be increased beyond 50%. Doesn’t make sense if I’ve got 30 more years of accumulation pending.

    PPF and EPF (atleast now, before DTC) are EEE mode of tax breaks. NPS isn’t.

    Also, at the time of maturity, I can’t withdraw all the money – a significant amount of the money should be in purchasing an annuity. That *might* be okay, but the approved annuities are … Insurance fund annuities. Not Mutual funds MIP or income schemes, not senior citizen savings scheme, not the MIS, but insurance annuities. That is a deal-breaker as far as I am concerned.

  5. The long lock is a problem. Under no circumstance I intent to pursue active duty/being salaried till 60. Opened an NPS when PFRDA got the new bill and some power.

    It the annual charges and account opening charges that are high. If I invest 10 K and need to pay 250 for maintaining it then its astronomical charge.

    The per transaction fee is Rs.23! Even NEFT/RTGS is cheaper! Is people recruited/who make decision at PFRDA morons – Sorry, but could not hold this question! A typical government scheme! Sick! And I fell for it! 🙁 🙁 🙁

  6. just one info:
    in ppf one earning member can not put more than 1L per year. that means if one earning memebr is depositing in kids (minor) ppf accounts, collective deposites in his own and kids account should not exceed Rs 1L.
    recently there are incidents in post PPF, where they have reversed the interest payment made in last so many year, where it is proved that collective deposit in various accounts of PPF by same entitiy exceeds prescribe limit of 70K earlier or 1L now.
    therefore, one need to be careful.

  7. Hi Subra sir,
    I am a fan of your blog. Daily morning i will read your articles.

    I read all your articles on NPS and you told that NPS charges are high and also not secure.
    I have one doubt regarding NPS.
    In our company, NPS is offering tax benefit under section 80ccd. This is apart from section 80c 1 lakh benefit. I think i can save more tax if i invest in NPS. Under section 80c, i am anyways investing in ELSS and PPF.
    I am waiting for your views.

    Regards,
    Rahul

  8. yes Rahul – read 80ccd, 80cce….together. There is a strong case for restructuring your salary and get the employer also to contribute to YOUR nps. your deduction of 100,000 is deductible, and employer’s cont upto 10% of ur sal is also eligible..so for people who can afford an extra 100,000 outflow, yup it makes sense…but do remember the long lock in. In fact this is useful for very well paid youngsters who can lock in for a long time..or people who are more than 50 – they will have a short lock in. HOWEVER DO REMEMBER THAT MOST OF THE money will HAVE to be annuitized..when it is coming back to you AND it will be taxable…

  9. Hi Subra sir,
    thanks for your reply and information about nps, today morning I changed my salary structure to normal and told goodbye to nps
    Regards,
    Rahul

  10. In the current scenario, it may appear that when the money from the NPS is returned then it’s in the form of annuity AND taxable.

    However, in my view, there is another aspect as well. NPS is a retirement corpus and government will do all possible to make this indeed a retirement scheme. Since 2004 (or may be 2002?) all government employees pension will be thru NPS. This means in another 20-25 yrs the NPS entire corpus will be HUGE. With such a large fund, annuity companies will surely introduce attractive annuity schemes. With regards to taxation – if we are talking about retirement then it’s very likely that income will such that it attract zero tax or lowest slab tax.

    The above is my view. And, I continue to contribute to NPS and enjoy tax benefits beyond 80C. Happy to stand corrected in my views above. This will help me make appropriate decision whether to continue with NPS or not.

  11. Hi Subra,

    My view on NPS is that: though we’ve to take annuity with its corpus, its good as long as only a portion of retirement corpus is in NPS (e.g., say 30%). I wouldnt mind buying annuity with that amount, because life expectancy is increasing (as you also said in many posts) and one of the ways to offset the risk of living too long is to choose ‘annuity for life’ option in pension plan.

    Please let me know your feedback on this planning.

    If employer supports NPS, that would be an added advantage to save some tax.

  12. Hi Subra,

    Today I met one officer from HDFC Life and he was persudaing me to take a Pension plan called “Super Saver +” rather than NPS. I have following queries , kindly answer if possible.

    1. I am now 43 and have following investments:
    a) SIP – 40K/ months (since last 3 years)
    b) PPF – 1 L/ year
    c) Have taken TERM insurance 50 L and Health Insurance – 10 L
    d) RD & FD – 20K/ month.

    Should I go for a pension scheme or I will go ahead on PPF (additioanl 1 L/ annum + 2 L in IDFC Index Fund) as suggested above.

    Looking forward,

    Regards, Karunakar.

  13. Dear Subra,
    I visited kotak Mahindra Bank to invest in NPS, they told me that it won’t b useful for me,and suggested me kotak capital plan stating that it is a retirement instrument plan with tax free withdrawals,should I invest in kotak capital multiplier plan,My age is 35 and I want to invest 1 lac.

    Regards,
    Vijay

  14. Bala Aramvalarthaan

    Subra,

    I came to know about U thru’ Vishal and since then, I read U regulalry – phenominal service I would say 🙂

    The 80CCD tax treatment make NPS attractive I guess. U were also mentioning about this possible tax treatment in this artcile(The only spanner in the works is if the government introduces a separate deduction of say Rs. 3L over and above the 80C)

    Regarding NPS – Tier-I account where Employer contribution is tax free upto 10% of Basic+DA and there is no limit. Belive me – there is no limit to it. Say my annual basic is 1Crore and I put 10% of it in this NPS, then I get 10Lakhs deduction apart from 1.5Lakhs under 80C and other standard deductions.

    As U rightly predicted, this tax treatment make us to rethink on NPS I guess. Let us know U’r opinion.

    Thanks,
    –Bala
    Ref: http://india.gov.in/spotlight/national-pension-system-retirement-plan-all
    [Benefits to subscribers at Corporate says:

    The additional tax benefit to the employees joining NPS as per the Income Tax Act, 1961 – External website that opens in a new window is perhaps the finest USP of the scheme. A subscriber’s contribution to NPS tier I upto 10% of the salary (Basic +DA) is tax exempt under sec 80 CCD (i) with a ceiling of Rs.1.00 lacs under section 80 CCE. Besides, the employers’ contribution upto 10% of the salary (Basic +DA) is also tax exempt in the hands of the employee under Section 80 CCD (2) of Income Tax Act. This exemption is over and above the Rs.1.00 lac limit, thus making NPS the exclusive option for this tax treatment.

    ]

  15. Bala Aramvalarthaan

    Subra,

    My statement is slightly misleading. When I put 10% of it – I put 10Lakhs and Employer puts 10Lakhs. The employer contribution of that 10Lakhs is tax emempted under 80CCD.

    With regards,
    –Bala

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