The New Pension Scheme (NPS) was launched for the public in 2009 with negligible fund management charges. The latest move from PFRDA (Pension Fund Regulatory and Development Authority) was to hike the fund management charges for non-government employees’ contribution from 0.0009% to 0.25%. Apart from the massive hike in fund management charge, the biggest drawback of NPS is the tax implication of your corpus. 

 

NPS does not let you withdraw all your earnings at one time—ever. As per the current rules, you can exit NPS only at 60 or later. And what happens if you abandon NPS before that? Let’s say you quit when you are 50 and your corpus is Rs60 lakhs. You will have to buy annuity with 80% of the money or Rs48 lakhs and you will get Rs2 lakhs in hand. Now let’s go back to the first case. You have completed 60 and your corpus has grown to Rs1 crore, of which, at least 40% (Rs40 lakhs) will be used to purchase an annuity. 

 

Annuities grow at approximately 7% per annum and are taxable if you have a taxable income. The remaining 60% (Rs 60 lakhs) can be withdrawn in a phased manner, between 60 and 70 years of age, and that is also taxable.

 

NPS comes under what is called EET (exempt-exempt-tax) system, which means that while contribution up to a limit and the returns NPS are tax exempt, withdrawals are taxable at marginal rate. The biggest drawback for NPS is taxable withdrawal, others being locking of funds and buying annuities compulsorily. Including NPS in EEE (exempt-exempt-exempt) category has been recommended in the Direct Tax Code. 

 

Many websites wrongly claim the lump-sum (60%) being tax-exempt-a wrongly understood concept. You are not paying taxes on the gains, but on the amount you withdraw, which is an absolute killer. Until NPS gets into EEE category, it is one of the worst pension products. Its taxes eats away returns, if you belong to the taxable bracket, plus you will be stuck with low-return annuities.