A national pension scheme is one of the retirement plans in India. As we all know, individuals take measures for regular income post-retirement. Just like for every pro there is a con; every advantage has other disadvantages too. So, in this article, we’re going to cover the disadvantages of the National Pension Scheme.
Unfortunately, most subscribers are not aware of ‘how the national pension scheme works.’ They just invest in it to save some taxes. The tax benefits get offered while contributing to NPS. So next let look forward to the disadvantages or drawbacks of the national pension scheme:-
Disadvantages Or Drawbacks Of The National Pension Scheme
1) National Pension Scheme Corpus Is Not Tax-Free On Maturity:-
This scheme is not tax-free on maturity.
Taxation Of Corpus Discourages Investors:-
The tax treatment of the corpus is the main reason for which the individuals are not applying the NPS. Just 40% of the corpus is free of tax. It requires 40% of your entire money. It eventually gets levied with tax impositions. This national pension scheme from the annuity is a composition of the principal and gain. Here the individuals need to pay tax on the gains and also in the invested amount. However, it is genuine for many to not accept it though.
Added to that, it doesn’t cease to astound us. Though it’s a very long term investment, yet, NPS investors are not available for the benefits that other investors get. However, investors may find some solace after three years. Then, they get charged at a much lower interest. Yet, the NPS subscribers are not applicable for the inflation indexation.
In the recent form of the NPS, it is so much enigmatic concurrence of EET and EEE.
A part of the corpus is tax-free but another portion is put into an annuity but at last in the end, it will get taxed. For the general subscribers, this is quite hypocritical, to say very little about it. The rules have to be simplified, if it will, then this scheme is more acceptable to the individuals. Placing the boundary it will create an artificial vault. The investment will become the scarcity level of saving for the subscribers of whatever his/her actual retirement maybe. Those tax wrinkles in the National pension scheme is needed to get ironed out.
2) The Inflexibility Due To The Diligent Annuity:-
There’s enforcement on almost every investor to fund about 40% of the corpora. Apart from that, there’s also no tax-efficient option.
Low Annuity Rates Won’t Beat Inflation:-
The big drawback is with the withdrawal rules. NPS returns are likely to beat those from the EPF. NPS forced investors to take an annuity with a 40% corpus, which will constrict his or her calibre to fight with distension after the retirement. At a slender 6%, year-on-year swelling is so many expenses and a monthly pension of Rs 10,000 will get accepted. At the age of 65, they will lose 25% of its acquiring ability and at the age of 72, they will lose 50% of it’s acquiring ability.
The annuity they will buy can only get adjourned for three years. It means that there’s no age affiliation extra credit with adult age. Also if any investors will die in that period of cessation, then the partner will get forced to buy the annuity.
It is probably satirical that the investors of the pension plan have to buy hierarchal schemes. These get allotted by the insurance organizations.
If the mandatory annuity requirement can’t get removed then PFRDA must at least consider offering a special annuity rate for the NPS investors to compensate them. And the deficiency of the liquidity and market risk on the occupancy of the scheme.
When there is so much consecration (EPF, PPF, Mutual funds) then the imperative annuity necessity, lock-in, and inauspicious taxation offer sensible investors will not get motivated to repute the National pension scheme. They understand that the excessive Rs 50,000 will get deducted taxable income and will be offered by NPS.
3) 50% Of The Cap On Equity Restricts Potential:-
Invasive individuals may want to invest too much in the equities. The 50% cap is used to enhance the number of subscribers. They used the idea of funding in valuation. If the subscribers get to know about their next step, it would much easier for them to place it firmly. There’s an additional plan of investment, lifecycle investment. The minimum equity percentage for funding to initiate is 75.
The most essential thing is the investments in the NPS will only be part of one’s overall assets. Besides the National pension scheme, a subscriber can apply for the other schemes. Since retirement is the extreme away, so he or she requires other investments. It might offer them the maximum returns. It gets fixed until retirement. By subtracting the 50% cap and adding the 100% division of the equities, the NPS will become the perfect retirement saviour.
4) No Assurance On The Returns:-
Some unions conflict with the NPS because it will not offer secure returns. The national pension scheme may be good for the individuals right now because the marketers doing good, but it may change if there will be a downturn. So many resources of the National pension scheme have given merely just 2% back in the past one year.
If the equity of marketers cash, the returns they give it may be in the negative direction. Then they have a corpus which will be smaller than he or she planned for. Will he or she be able to endure without his or her pension just for the reason that the markets are not high. A young adult of lets says 25 years can get over any such loss. But for a retired person, it is tense to impossible. That’s the reason why investors want some kind of assurance in income during the retirement period.
5) Restrictions On Withdrawal:-
One of the main disadvantages is the restriction imposed on the withdrawal of your contribution. Only 25% of the investment could get withdrawn at any point. It also discourages many to invest in the National pension scheme.
6) Better Alternatives Available:-
Mutual funds, public provident fund, and tax-free bonds, etc. have a short lock-in period. Along with being tax-efficient, they’re more flexible when compared to the NPS. Although the benefits of the tax also available on the investment of the NPS.
Even though there are so many disadvantages, still there are many advantages you must look into before leaving the article. Let’s know a bit about them in brief.
Advantages Of NPS
1. Its Discretionary Nature
Since it is discrete, so you can fund it whenever you want. If there’s any financial issue, you can skip for a month or two. Yet, you can skip it for a max of 6 months. After this, it freezes. So, make sure you don’t prolong more.
2. Quite Easy To Operate
Managing it is quite simple. All you have to do is open an account. It is as easy as regulating Facebook. Simply go to the site – https://enps.nsdl.com/eNPS/
3. Its flexibility
The flexible nature of NPS is something that you might not get in any other investment. Here, you’re free to pick which investment type goes along the money in your pocket. You’re not bound to follow an already framed instruction type or compromise on your expenditure.
4. It’s movable
Let’s assume a situation where you’ve moved to a new city. From there you can operate your NPS account. You need not shift it every time you move to a new place.
5. It’s well managed
The instructions framed and followed are quite transparent. The PFRDA manages it and proves that your money goes in good hands.
NPS In Brief:
NPS retirement scheme was issued for the employees of the government sector. However, from 2009 it was available for all the individuals of India. Currently, the citizens of the age group 18 to 65 years only they can apply for that scheme. Contributions to the NPS by the citizens will get accumulated until retirement. The mass growth will continue with the market-linked reverse. All the individuals who applied the scheme also have an option in the scheme to exit this plan before retirement. Yet, the rules of the scheme confirm that some parts of savings will provide the individuals with some benefits on retirement. However, this scheme has other disadvantages to deal.
Facilities Of The National Pension Scheme:-
i. Government-Sponsored Plan:-
This scheme is a government inseminated retirement scheme, regulated by the PFRDA (pension fund regulatory and development authority). It established NPS trust to closely monitor the performance of the subscribers. It also helps to periodically assess if any revision is needed.
ii. Primary Focus On Retirement:-
This scheme aims at giving the benefits of retirement to individuals with a good performance scale. But the limitations of the withdrawal confirms that the intention of this scheme will not get lost. NPS intends to confirm a constant flow of income for the individual. On accomplishing to the exact age, the citizens can avail of financial help when another way of income becomes dry.
iii. Economical Plan:-
This scheme is a very low-cost retirement scheme which is available for the citizens. Low fund administration representation results in high growth, and available for the subscribers. It provides them with an affordable fund under NPS.
iv. Financial Disciple:-
It is a long term investment process. It contributes a diligent handle of financial issues. They need to plan their financial goals and ascertain their future financial requirement.
v. Tax Implications On NPS:-
The recent amendment makes this scheme partially exempt. It implies that the investment proceeds in a tax-free zone. But 60% of the NPS corpus will be available for withdrawal at 60 years. The remaining 40% of the fund will be used to buy an annuity plan that persists on taxable rate as per the tax brackets.
Frequently Asked Questions:-
1. Who can invest with the NPS?
The main mandatory requisite criteria to bear it is that the subscriber must be an Indian. Next, go to the age requirement which is between 18-25. Bear your KYC requirements for them to qualify for the NPS models. Then you can go for investing in it.
2. Is NPS open for NRIs as well?
Yes, NRIs are free to go for NPS. For that, they need to provide their residence/area of living. However, it is valid till they’re funding in the scheme.
3. Can I go for multiple NPS subscriptions?
No, you cannot invest in more than one NPS because this scheme comes with a unique plan for every individual.
4. How to check for PoPs whether the assigned bank supplies it or not?
For that, you need to visit the official NPS site. Look for the list of the approved banks. There you’ll know whether your assigned bank supports the plan or not.
Investment in the NPS has its own set of advantages and disadvantages. It’s a decent retirement plan. It includes the investment in the equity funds, debt funds along with the adequate life, and the health cover. Remember that a single financial product is not enough to provide a complete financial cover.