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All you have to know about NPS

NPS is a retirement option that invests in different asset classes such as equities, corporate bonds and government bonds.

Do you want to plan for retirement?  But do you think you will be tempted to withdraw from your retirement planning funds?

While our parents and grandparents had the luxury of pension, today’s generations have to think and plan for retirement. With the ever-rising cost of living and medical expenditure, lack of social security system, retirement planning has become a necessity.   

National Pension Scheme (NPS) may be a good retirement product for you. Its objectives are providing old age income, reasonable market-based returns over the long term and extending old age security coverage to all citizens.

You can contribute a specific amount every month towards your retirement. While it is compulsory for central government employees to invest in NPS, NPS is an optional retirement choice for other individuals.

It is created by the government and is managed by the Pension Fund Regulatory and Development Authority(PFRDA)

Here are some of the features of the national pension system:

Maturity period: As it is a retirement product, you should try not to withdraw money before your retirement age. It is because as your investment amount increases and you stay put, your investments will grow higher. Hence, it is not advisable to withdraw before the retirement age.

In NPS, you don’t receive the whole investment amount as lump sum. You have to buy annuities which will provide for the pension. If you withdraw your money before reaching 60, you have to invest at least 80% of the pension wealth to purchase a life annuity from any life insurance company. The rest of the 20% may be withdrawn as a lump sum.

After you reach 60, you would be required to invest at least 40% of your maturity amount to purchase an annuity and the rest of the amount can be either withdrawn in one go or a phased manner.

Types of NPS: To suit the needs of different individuals, the National Pension System has two different accounts. Tier-I pension account and Tier –II savings account. In tier-I pension account, you can contribute your savings which is locked till 60 years. On the other hand,  Tier-II savings account is a voluntary savings facility and you can withdraw your savings from this account any time you want.

Different fund management schemes: You can invest in The National Pension Scheme through two ways: Active choice – Individual Funds and Auto choice – Lifecycle Fund.

Active choice:

You can take the active choice if you are confident about managing your own portfolio. You can actively decide how your money should be invested based on your personal preferences. You can provide the preferred asset classes as well as the percentage allocation of each. There are four asset classes: equity, corporate debt, government bonds and alternative investment funds. The total allocation among these asset classes should be 100%.

In the E option i.e. equity option it predominately invests in equities and it has the potential to give you higher returns but it also comes with high risk.  Recently, the equity exposure in this option was increased from 50% to 75% for individuals for up to 50 years. This gives investors the opportunity to get higher returns on their investments. The equity allocation goes down after 50 years and you can invest a maximum of 50% in equity when you are above 60.

There is no limit on the percentage that you can invest in corporate bonds (C option) and government bonds (G option). They give medium to low returns with medium to low risk. However, the percentage contribution cannot exceed more than 5% in alternative investment funds which include instruments like CMBS, MBS, REITS, AIFs, Invlts etc.

However, you have to keep in mind that it is a default option and you need to specify the different investment allocation across the different asset classes.

Auto choice – Lifecycle Fund

The auto choice is a good option for individuals who do not have the expertise of managing NPS account or would rather want the investment allocation to be automatically adjusted according to their age. In auto choice, the proportion of the funds invested across the asset classes will be automatically determined by the age of the subscriber. If you would want your equity exposure to reduce as you get older, the auto choice will be the best choice for you.

There are three different options within the Auto choice based on different risk profiles. These are Aggressive Life Cycle, Moderate Life Cycle and Conservative Life Cycle and are suitable for aggressive investors, moderate investors and conservative investors respectively.

In the aggressive life cycle, a maximum of 75% will be invested in equities until 35 years of age. The equity exposure will gradually reduce and the exposure to other assets such as corporate bonds and government bonds will increase.

The Moderate life cycle comes with a cap of 50% of the total investments in equities and conservative life cycle with a cap of 25%.

Minimum contribution:

The minimum amount in NPS is same for all the options. The minimum amount per contribution is Rs.500 and the minimum contribution per year is Rs.6,000. You can either invest lump sum or make contributions as per your convenience. Currently, few of the banks have auto-debit feature for NPS customers where a fixed sum of money will be automatically debited from their savings account.

Tax efficiency: The contributions made under the National Pension Scheme are eligible for tax deductions. For salaried and self-employed individuals, investment of up to Rs. 50,000 in Tier I NPS account in a financial year qualifies for tax deduction under Section 80CCD (1B) of the Income Tax Act. This is in addition to Rs.1.5 lakh allowed under Section 80CCD (1) for investment towards NPS. So overall, a subscriber can claim an income tax deduction of up to Rs. 2 lakh in one financial year.

How to apply:

There are 8 pension fund managers in NPS Tier 1. Some of these pension funds include HDFC Pension Management, ICICI Prudential Pension Fund and Kotak Mahindra Pension Fund.  Many banks offer NPS. You can easily open an NPS account by visiting your bank branch or other points of presence corner. You can also open a pension account under NPS online through eNPS where you have to upload a few scanned documents after which you will be routed to a payment gateway to make the transaction.


The returns given by NPS will depend on asset allocation. The equity asset class has the potential to give higher returns than government bonds. According to data on NPS Trust, NPS Scheme – E (Tier 1), the pension fund managers have given returns between 10% to 15% since inception as on 31st March 2019.

Conclusion: NPS is a good retirement option. With NPS, you have the option to manage your own asset allocation or make it automatic. Your portfolio is diversified with various asset classes such as equity and debt which helps in reducing risks as well earn the benefits of different asset classes. However, the only limitation of the National Pension Scheme is the annuities which need to be brought after the maturity date. The NPS has gone through a series of changes making it investor friendly and it is likely that it will continue.

Related articles:

Comparative Analysis of EPF and PPF

Employee Provident Fund (EPF)



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