Most Indians enter the investment and savings arena with set short-term goals like buying a home or financing a wedding. Retirement often takes a backseat for most of us. With increasing retirement planning awareness, the introduction of several government-backed schemes, and lucrative tax rebates, this has changed for the better.
NPS, or the National Pension System, is one such government-backed retirement-cum-investment scheme regulated and managed by PFRDA. Started in 2004, NPS is open to all Indians (residents and NRIs) between the ages of 18-70 years. Based on the concept of defined contributions, NPS offers a lump-sum retirement corpus for your golden years, along with annuity-based monthly pensions.
This market-linked investment scheme also offers subscribers the option to invest in equity and debt assets and earn risk-adjusted returns. With risk-based asset choice, fund manager options, contribution flexibility, and sizable tax breaks, NPS offers several benefits that make it a lucrative retirement investment scheme.
Should I Invest in NPS?
If you’re still on the fence about investing in NPS, here’s a list of reasons why you should start now:
Investment Flexibility
You can start an NPS Tier I account with an initial contribution of just ₹500 and a minimum yearly contribution of ₹1,000. Apart from these mandates, there are no more contribution restrictions for Tier I accounts. So, you can flexibly contribute to the retirement scheme anytime without facing caps on the frequency or value of contributions.
You can track the performance of the selected pension fund and/or switch funds based on your assessment. Similarly, you can switch fund managers once a year or change your investment route (Active/Auto).
Fund Allocation Freedom and Portfolio Diversification
NPS allows you to draft a portfolio that suits your risk appetite. As mentioned earlier, there are two investment routes for NPS. One is the default Auto investment option, where fund allocation in your portfolio is pre-given based on age. Under the alternative Active Choice option, you can decide your asset allocation (with a 75% cap on equities).
Spreading out your investment under NPS across equity, corporate debt, government bonds, and alternative asset classes creates a diversified portfolio. This helps hedge risks while ensuring stable returns for a secured retirement.
Low-Risk Investment
Since NPS is a government-backed retirement saving scheme, your retirement corpus remains safe. NPS is managed by PFRDA (Pension Fund Regulatory and Development Authority). PFRDA also reviews the performance of the 10 Pension Fund Managers (PFMs) and seven authorised annuity service providers to ensure complete transparency and trust.
High Returns and Compounding Benefits
As a market-linked retirement-cum-investemnt scheme, NPS interest rates vary depending on the asset’s performance. That said, historically, the NPS interest rates have ranged from 9%-12% over ten years. Interest rates for low-risk investment options like FDs have varied from 2.10%-9% over the same duration. Thus, NPS interest rate makes it a lucrative alternative to traditional low-risk investment avenues.
Under NPS, you can benefit from the high risk-reward ratio of equities and the stable returns from debt funds. This mixed approach ensures that returns remain steady. Moreover, apart from NPS interest rates, you also benefit from the power of compounding. The money you invest in the scheme earns compounded returns, giving you a sizable retirement corpus. This corpus goes to your nominee in the event of your untimely demise and can be used to secure their future.
Portability Benefits
Unlike regular pension schemes, NPS offers you the benefits of portability. Since NPS is based on your PRAN (Permanent Retirement Account Number) and contributions to the scheme can be made online, you can manage it from anywhere in India.
In other words, you can maintain a single pension account while shifting sectors, cities, and companies, retaining the benefits and corpus secured under this retirement-cum-investment scheme.
Low-Cost Investment
Exit loads of most equity-linked investment instruments in India vary from 1%-2.5% of the corpus value. However, NPS charges an exit/withdrawal fee of just 0.125% of the corpus value, with a maximum limit of ₹500. Similarly, mutual fund expense ratios that cover the fund manager fees are also high. However, NPS levies a nominal fee of 0.3%-0.-9% on the aggregate AUM slabs.
This, coupled with the scheme’s flexible contribution clause, tax benefits and high return prospects, make it one of the most cost-effective retirement-cum-investment products producing market-linked returns.
Partial Withdrawals
Apart from securing your retirement, NPS also ensures you have access to immediate funds. While you can only withdraw 25% of the corpus from Tier I accounts after ten years, Tier II accounts are much more flexible. If you open a Tier II voluntary account with a minimum initial deposit of ₹250, you can withdraw any sum, anytime.
Lucrative Tax Breaks
By investing in this tax-saving retirement savings scheme, you can claim tax breaks u/s 80CCD(1). As a salaried employee, you can claim up to 10% of your basic salary+D.A. as a deduction. Self-employed individuals can claim up to 20% of their total gross income. Do note that these deductions, coupled with the ones claimed u/s 80C and 80CCC, cannot breach the ₹1.5 Lakh threshold.
You can also claim an additional deduction of ₹50,000 u/s 80CCD(1B) over and above contributions claimed u/s 80CCD(1). If your employer contributes to NPS, you can claim up to 10% (14% for government employees) of your salary+D.A. as deductions u/s 80CCD(2). The maximum contribution limit is ₹7.5 Lakhs. However, remember that the possibility of claiming these deductions will be subject to the tax regime you select.
Moreover, 60% of the NPS corpus you receive as a lump-sum payment, coupled with the 40% used to purchase an annuity, is also tax-exempt. However, your pension from the annuity plan is taxed as per your tax slab.
The Bottom Line
Planning your retirement takes time, patience, and discipline. The key to a comfortable retirement is early planning. If you start in your early 20s or 30s, with the relatively high NPS interest rates and compounding benefits, you can enjoy a worry-free retirement. With the 60% lump-sum amount, you can purchase a retirement home using the monthly annuity-based pension to meet your medical and livelihood needs.
Moreover, as an early bird, you can periodically revise NPS asset allocations to further maximise your returns from the scheme. Doing so will help you realise your life-long goal of going on a foreign tour and maintain your pre-retirement living standards without compromises.