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Tuesday, June 24, 2014

Is investing in NPS (National Pension Scheme) really useful? (QandA : 004)

Question : 004
Is investing in NPS (National Pension Scheme) really useful?
Even if your company has aligned its salary structure to provide you "additional tax benefits" and persuading you to invest in NPS, you must think through before indulging in this long term commitment.

Answer : 004
Well, it depends on how your portfolio is currently aligned.
If you are already heavy on non-debt based investments like EPF (Employee Provident Fund), PPF (Public Provident Fund), FDs (Fixed Deposits), Debt Funds etc...i see no point investing in another debt based scheme.

While NPS looks lucrative from additional tax savings perspective, but one must remember that:

1) NPS falls under EET tax regime, which means any withdrawal is taxed at the prevailing income tax rates at the time of withdrawal. (unlike EPF and PPF, which fall under EEE regime - and everything is tax free). Though making NPS as EEE complaint is being discussed by the government, but not sure what will finally happen. 

2) You might feel that you might save 30% tax right now and when you retire and withdraw money, you might be in a lower tax bracket (may be 10% or 20%). Well, difficult to say, but i would rather plan my life to be in 30% tax bracket after i retire, than plan for being in 10%.

3) 40% of the entire Corpus in NPS will be mandatory to be invested in Government Annuity (which, as per me, is the worst possible investment of money)

4) Your portfolio overweight to non equity (debt) based investments must be looked into. As a thumb rule, if you are 40, you should have not more than 40% of your total invest able surplus money invested in debt based investments. If you are already overweight on debt, you might not want to further increase the weight of non equity based investments.

I personally decided not to invest in NPS, and i would advise you to at least wait and watch (till there is enough clarity from the govt on EEE regime), unless you are already too heavy on equity based investments and are desperately searching for debt based safe instruments.

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