Everyone who invests his money consider following points:
- Principle should remain intact.
- Good Return.
- Lock-in period.
- Tax Benefits.
- Exit option should be available.
- Maturity Options
Let us talk about these points one by one.
Principle should remain intact
NPS is like a mutual fund. Please note that it is like a mutual fund. It does not mean, it is a mutual fund. Like mutual fund, it has fund managers which manages your fund of NPS. You may select a larger portion of NPS fund being invested in equity market and less portion in Debt market or vice-versa. You can also select auto choice option where funds are invested in different markets according to your age. At lower age, more funds are invested in equity market and low in debt market. With increase of age, portion of funds in debt market increases and correspondingly decreases in equity market. Equity market is high risk, high return market whereas debt market is low risk, low return market.
Since, debt market is less risky, there is almost complete security of your principle amount.
Equity market is very risky and one may loose big if something wrong happens. However, more or less, in the long run, I do not think it is risky to your principle amount. In short run, loss of principle amount is more. Since, NPS is a long run scheme, there should not be any risk to principle amount.
Good Return
If one invests his money, he expect a good return on that. Return always depends on the level of risk taken. Higher the risk, higher the return and lower the risk, lower the return. There is direct correlation between risk and return.
As I have mentioned above, equity market is high risk market, it will give high returns. On the contrary, debt market is less risk market, it will give low returns.
Considering above, I presume that NPS will give you a reasonable return in the long run. But return will depend on the level of risk.
Lock-in Period
Every investor want his funds back as soon as possible. But since, this is a pension scheme, lock in period is too high. One cannot withdraw his funds till the age of 60 years.
Tax Benefits
If tax benefits are available, scheme becomes very attractive to the taxpayers. This scheme entitles you tax benefit u/s 80C upto maximum of INR 1,50,000 per annum.
Exit option should be available
If the lock–in period is high, investors should be given an option to exit the scheme in between with some penalty clause. In NPS, exit option is available from day one. But there are certain clauses attached to it. From minimum of 80% of NPS funds, one need to purchase life annuity from IRDA approved life insurance company. You can withdraw only maximum of 20% of NPS funds. You can allocate more than 80% of NPS funds to purchase life annuity and it can go upto 100% but you can reduce this 80%. In case of death, 100% amount is given to the nominee.
Maturity Options (60 years of age)
Maturity of NPS happens when you have attached age of 60 years. On maturity, you will have to purchase life annuity from minimum of 40% of NPS funds and balance 60% can be withdrawn. You can increase this 40% to 100% but cannot reduce this.
Now, what is the problem?
Principle should remain intact
Almost every investment options in long run secures your principle amount. So, why should I go with NPS?
Good Return
Almost all investment options promises to give good return. PPF is an investment option without any risk and gives return of currently at an avg. of 8.70%. If you directly invest in share market, it will also give you good returns in long run. In terms of investment, NPS is not different from any mutual fund investment. Mutual funds also invests in different markets. Then, why NPS?
Here NPS is better than mutual fund as there are some choices given to you. Also, you have been given auto choice as well. In case of auto choice, investment in high risk market is done when your risk taking capacity is high (in young age) and when you are risk averse at old age, it invests in very risk market. You need not to do anything. Funds allocation are automatic.
Lock-in Period
This scheme has lock in period till the age of 60 years. Whereas there are many other investment options where lock in period is much less than this. Like in PPF it is 15 years. KVP has lock in period of 8 years 7 months. Some investment options does not have lock in period at all like mutual fund investments.
Tax Benefits
Tax benefit u/s 80C is available in case of other investments also. PPF, NSC, notified units of UTI, LIC, etc. are entitled to deduction u/s 80C.
Exit option should be available
Every scheme has exit option available and some schemes have better exit option available. Then why NPS?
Here NPS is not attractive as it requires you to take life annuity from IRDA approved life insurance companies, that too for at least 80% of your amount. This is too much. If you are investing from point of view of investment in NPS, then you are gone. NPS shows you its real face here, the dark side. But if you have taken NPS as an life insurance, it is like any other life insurance policy with money back option.
But why should I be forced to purchase insurance policy? I can purchase insurance policy on my own whenever I need.
Maturity Options (60 years of age)
At maturity every one expects good amount in hand. But NPS gives you in hand only maximum of 60% and balance you need to purchase life annuity from IRDA approved life insurance policy. Why should I purchase life annuity?
Reason being, it is pension fund. Life annuity means you will receive a certain amount every year as a pension amount from insurance company till the time you are alive. However there are other options as well. As of now, there are three options:
- Payment of certain amount to the policy holder till his/ her death.
- Payment of certain amount to the policy holder till his/ her death and return of sum assured/ purchase price (40% of NPS fund excluding taxes) to the nominee.
- Payment of certain amount to the policy holder for fixed period of 5 or 10 or 15 years, as per your selection. In case of death in between, this certain amount is paid to the nominee till 5 or 10 or 15 years are completed.
Again, I have same question. Why are you forcing me to purchase policy? I will purchase policy as per my own wish.
So, do you think, at maturity, NPS is better as that time you will have pension? I do not think so.
Let us see.
What will you get from insurance companies?
Out of the three options, in the first and third option,
you will get around INR 6000 per annum (+/- INR 300 considering difference in 1st and 3rd options) as pension amount per INR 1,00,000 till the death. It means if you have 40% of NPS funds equal to INR 10,00,000 (taxes ignored), you will get INR 60,000 per annum. I have referred to the annuity table given online on the website of different insurance companies. There is not much difference in the values of different insurance companies. Please note that pension amount is paid on monthly basis i.e. you will get INR 60000 divided by 12 = INR 5,000 every month.
In the second option, for this INR 10,00,000, you will get INR 32,000 per annum (+/- 100 considering difference in rates of different insurance companies) and return of INR 10,00,000 to the nominee on death. Again taxes ignored. Please note that pension amount is paid on monthly basis i.e. you will get INR 32000 divided by 12 = INR 2,667 every month.
What will you get if you invest in FD instead of taking insurance?
Now if you invest this INR 10,00,000 in FD instead of purchasing life annuity that time, you will get INR 85,000 per annum if rate of interest is 8.50%.
So, first and second option are very bad. It is better I invest my amount in Fixed Deposit (FD), I will get more amount.
In second option, since, there is return of INR 10,00,000. You may think it is better. But actually it is not. Suppose insured person dies after one year. As per insurance policy, he will received INR 32,000 in first year and his nominee will receive INR 10,00,000.
If this amount is invested, he will get INR 85,000 in one year and his nominee will receive INR 10,00,000 from the bank.
So why should I go for insurance policy? Rather I should say why to go for NPS?
Looking at the above, I would say NPS is one of the worst investment, pension and insurance Scheme. You will not achieve anything from this Scheme except loss. It has failed to achieve its objective if compared with other available options.
However, one can say, he will get tax benefit on contribution. But I can get the same tax benefit by investing in PPF which is much better in all terms from NPS. The main purpose of NPS is to provide pension on retirement and this is also the main problem with this Scheme.
Disclaimer: Please note that these are my personal views. Please do check with your consultant and/or go through the NPS offer document before making any decision. I am in no way discouraging/ encouraging investment in NPS. You can visit https://npscra.nsdl.co.in/offer-documents.php for offer document.
: Sukanya Samriddhi Account (SSA) vs Public Provident Fund (PPF)
: NPS (National Penstion System)