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Investor is forced to put 40% of the corpus a low-yield and tax inefficient option.
Although NPS returns are likely to beat those from the EPF, the rigid withdrawal rules are a big drawback. Forcing the subscriber to buy an annuity with 40% of the corpus can restrict his ability to fight inflation after retirement. At a nominal 6% year-on-year inflation in expenses, a monthly pension of Rs 10,000 (after tax) received at age 60 will lose 25% of its purchasing power by the time he is 65 and 50% of its purchasing power by the age of 72. Subscribers annuitising 60% of their corpus ..
The annuity purchase can only be deferred for three years, meaning one cannot take advantage of favourable annuity rates at higher ages. Also, if a subscriber dies during the period of deferment, the spouse will be forced to buy the annuity.
It is perhaps ironic that subscribers of a pension scheme must get pension by buying standard annuity products offered by life insurance companies. If the mandatory annuity requirement cannot be removed, the PFRDA must at least consider offering a special annuity rate for NPS subscribers to compensate them for the mandatory annuitisation upon exit and the lack of liquidity and market risk during the tenure of the scheme.
When more and more Indians are considering retirement before 60, an age-based exit rule is impractical. But exiting at an earlier age would mean 80% annuitisation, which is too harsh on those who wish to opt for voluntary retirement. At the very least, the age of the NPS account could be considered instead of the subscriber's age and 40% annuitisation should apply to NPS accounts that have been operations for 15 years or more.
When there are other options with full liquidity and better taxation (EPF, PPF, mutual funds), the mandatory annuity requirements, lock-in, and unfavourable taxation offer a prudent investor no motive to consider the NPS. They would recognise that the additional Rs 50,000 deduction in taxable income offered by NPS comes with a huge cost.
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