Is National Pension Scheme (NPS) is the best Retirement option compared to Employee Provident Fund (EPF) and Public Provident Fund (PPF)?
Investor: Views mentioned in the below mentioned link about NPS are right?
Mr. Gerard Colaco: I do not agree that NPS is the best retirement option compared to the EPF and the PPF. The article referred to by you starts with the Rs 50,000/- additional tax benefit given to the NPS from 1st April 2015 under Section CCD of the Income-tax Act. This is ridiculous. There was an existing benefit of Rs 1.5 lakhs to the NPS already under Section 80C, although this space was shared by other tax saving investment avenues too.
I am amazed at the stupidity of the current crop of articles that are published on a daily basis, citing the additional tax benefit of Rs 50,000/- from financial year 2015-16 onwards, as if this one factor has suddenly and miraculously catapulted the NPS to the top of the tax-saving investment avenues league. If the NPS is so much better, why didn’t the same financial journalists trumpet its benefits earlier?
Before I proceed further, the NPS has mainly two options – Tier-1 and Tier-2. I am aware that there is the Swavalamban option, but that is only for encouraging very poor workers. I refer to only the Tier-1 account in this opinion, because the Tier-2 account has no tax benefits whatsoever. My main arguments against the NPS have not changed. They are:
- Even for a very long time horizon, a maximum of only 50% allocation to equity is permitted, even if the investor wants a higher equity allocation.
- While much is made of the very low fund management charge, there are multi-level charges at various offices and levels of the NPS system, the cumulative effect of which make the NPS is a far more expensive system than appears at first glance.
- Liquidity is a cardinal principle of any investment. In the NPS you will not be able to withdraw until the age of 60 except if you contract a critical illness or are buying or constructing a house. The difficulties in convincing the powers that be in India that you are withdrawing for a genuine reason like a life threatening disease, are well known. You are likely to die from your interaction with the NPS authorities rather than from the disease itself!
- The worst clause is that even if you have invested for decades and built up a big corpus, when you withdraw, 40% of that corpus has to be compulsorily used to purchase an annuity from a life insurance company, when withdrawal is done after the age of 60. But, if withdrawal is done before that, then a staggering 80% of the accumulated capital must compulsorily be used to buy a life annuity and the balance of 20% can be utilised by the account holder for any purpose. Annuities are high-cost, low-return products of life insurance companies, excellent for the agents and companies that sell them, and terrible for the poor wretches who buy them. If someone buys an annuity, he is proclaiming to the whole world that he knows nothing about investment, and that his main objective is to enrich the insurance companies and insurance agents who respectively produce and sell annuities. I will not give a single rupee of my hard earned money to the rogues in the insurance industry.
- The entire income stream from the NPS – the lump sum and the pension – is fully taxable, except the portion actually used to purchase the annuity. Furthermore, annuity payouts are also fully taxable. Contrast this with investments in equity and equity mutual funds which at least at present are exempt from the long-term capital gains tax. The PPF also does not suffer any tax on withdrawals.
- The best retirement option for any investor who has more than 10 years to retirement is uninterrupted systematic investment into an ELSS plan (if tax benefits under Section 80 C are required) of a mutual fund or a decent diversified equity mutual fund. The best retirement option therefore is neither the NPS, nor the PPF nor the EPF. The EPF and the NPS are attractive under one circumstance only. If the employer has chosen one of these avenues for investing the retirement benefits of the employee and there is a matching contribution by the employer, then, to the extent that the contribution of the employee is matched by the employer, the EPF and NPS become unbeatable. But this is not because the EPF and the NPS are great investments. It is merely because of the employer’s matching contribution.
A N Shanbhag, one of India’s finest writers on personal investment, has this opinion of NPS in the 31st edition of his book “In the Wonderland of Investment”: “The disadvantage of taxability on withdrawals and annuity receipts, or on death, is so overwhelmingly large that it is difficult to accept that the advantage of low cost will counterbalance this.”
The writer of the article referred to by you speaks about Dhirendra Kumar of Value Research Online endorsing the NPS. But the same Dhirendra Kumar appears to have had a rethink on the NPS. I am reproducing below Mr Dhirendra Kumar’s subsequent article in Value Research Online dated 23rd March 2015.
Investor: One of the link in below mentioned article in ET talks about the annualized return generated by NPS in the past, which is 18.9% to 20.9% for the last 9 months and 10% to 12.5% since May 2009. The clear reason for the same is due to rally in the equity and bonds. However, what is the average return can NPS generate in the long term?
Mr. Gerard Colaco: I have seen the ET article. For the last 9 months to a year, your equity funds have given higher returns, simply because the market went up. As you have correctly pointed out, it was also a period when bonds rallied. Such periods occur rarely.
In the very long run, an NPS option of 50% debt and 50% equity will give the return of a 50:50 balanced fund. However, the disadvantages of taxability on exit and compulsion to invest substantial amounts in annuities remain, rendering the NPS unviable, as Dhirendra Kumar suddenly seems to have realised.
Where I am concerned, I will not even take anything Warren Buffett says at face value. It will be subjected to pitiless analysis and I will come to my own conclusion.
I do not say that all my conclusions are right, but they are my conclusions. I have no problems with other opinions that people may hold. Whenever I find that someone else’s opinion is better than mine, I will change my opinion instantly.