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Introduction
Did you know that 9 out of 10 Indians don’t have enough retirement savings? Relying only on EPF or savings might not be sufficient when inflation rises. Many retirees face financial instability because they did not plan their pensions well. There is however something you can do to secure your future today. National Pension Scheme (NPS) is a government backed solution which ensures one’s long term financial security by helping an individual save and invest systematically for his retirement.
The National Pension Scheme (NPS) is a government-sponsored retirement savings plan available to individuals above 18 years of age. It is a long-term voluntary investment scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Due to its tax benefits, flexible investment options and stable returns, NPS has become one of the most preferred retirement planning options in India.
In this article, we will explore NPS benefits, NPS eligibility, NPS withdrawal rules, and its tax advantages and at the same time, let you know how to invest in NPS so that you can have your near and dear in future with a secure financial future.
Quick Overview of NPS
| Category | Details |
|---|---|
| What is NPS? | A government-backed pension scheme for systematic retirement savings. |
| Who Can Invest? | Indian citizens (18-70 years); Not available for OCI/PIO. |
| Types of Accounts | Tier I (Mandatory, tax benefits, withdrawal restrictions) Tier II (Voluntary, no tax benefits, free withdrawals) |
| Returns | Market-linked; historical returns of 9-12% p.a. |
| Tax Benefits | Section 80CCD(1): Up to ₹1.5 lakh (included in 80C) Section 80CCD(1B): Extra ₹50,000 deduction Section 80CCD(2): Employer contribution (up to 10% of salary) |
| Investment Options | Equity (E): High risk, high returns Corporate Bonds (C): Moderate risk, stable returns Govt Securities (G): Low risk, safe returns Alternative Assets (A): High risk, growth potential |
| Investment Choices | Active Mode (Manually allocate funds) Auto Mode (Age-based allocation) |
| Withdrawal Rules | At Retirement (60 years): 60% tax-free withdrawal, 40% annuity purchase Premature Exit: After 10 years, 25% withdrawal for specific needs On Death: Entire corpus to nominee (tax-free) |
| How to Open NPS? | Online: Visit eNPS Portal, complete KYC & invest ₹500+ Offline: Visit PoP (bank/post office), submit KYC, deposit funds |
| Why Choose NPS? | High Returns (Better than FDs & PPF) Tax Savings (Under 80C & 80CCD) Flexible Investments (Choose risk level) Regulated & Safe (Managed by PFRDA) |
What is National Pension Scheme (NPS)?
NPS is a market-linked pension scheme that allows individuals to systematically invest and grow a retirement corpus. Introduced in 2004 for government employees and spread to all Indian citizens in 2009, NPS mixes an equity and debt component to give out balanced growth over time.
The scheme is made of two types of accounts:
- Tier I Account: A mandatory retirement account with restrictions on premature withdrawals.
- Tier II Account: A voluntary saving account in which depositors can withdraw the money whenever they want, however, this has no tax benefit.
Benefits of National Pension Scheme
1. Attractive Returns
NPS invest in equity, corporate bonds, and government securities, offering returns superior to traditional fixed deposits and PPF. The historical returns for this scheme range between 9-12% per annum.
2. Tax Benefits Under NPS
This scheme offers significant tax savings under various sections of the Income Tax Act:
- Section 80CCD(1): Deduction up to ₹1.5 lakh per year deduction (under section 80C) is also considered a part of this.
- Section 80CCD(1B): Additional deduction of ₹50,000 per year over and above 80C.
- Section 80CCD (2): Employer contribution (up to 10 percent of the salary) is also covered under it and exempt from tax.
3. Low Cost & Transparent
It has one of the lowest fund management charges, ensuring higher long-term returns.
4. Flexibility in Investment
Subscribers can choose between:
- Active Choice: Investments between equity, corporate bonds and government securities are to be allocated.
- Auto Choice: The allocation will happen automatically of the age.
5. Income After Retirement
When he retires a part of this corpus is used to buy an annuity under which he can get a fixed pension income for the rest of his life.
6. Regulated and Safe
It’s too gets regulated by PFRDA which means it is transparent, safe and allows one to manage funds by professionals.
Eligibility for NPS
An investment of which anyone who meets these criteria can invest in this scheme.
- Indian citizen (resident or non-resident)
- Age between 18-70 years
- KYC Compliance (PAN, Aadhaar, bank accounts detail etc).
Note: It may be noted that, this scheme is not available to OCI (Overseas Citizens of India) and PIO (Persons of Indian Origin).
How to Open an NPS Account?
Online Registration (eNPS Portal)
- Go to official NPS website https://enps.nsdl.com.
- Navigate to ‘Choose Aadhar/PAN based verification’ and then click on ‘Register.’
- KYC details as well as personal details are entered and then uploaded.
- Select fund manager and investment choice (Active or Auto).
- Contribute a minimum of ₹500 (or Rs 300) on the first try (Tier I).
- In other words, an agent named Permanent Retirement Account Number (PRAN).
Offline Registration
- Visit a Point of Presence (PoP) (Banks, post offices, banks etc)
- Fill Complete NPS registration form and submit KYCs.
- Do the first contribution and get PRAN card.
Investment Options in NPS
This scheme allows investors to choose their preferred risk level for their investment.
1. Equity (E) – High Risk, High Returns
- Invests in stocks and equity related instruments.
- It stands out among all the investment types in terms of generating the highest level of growth.
2. Corporate Bonds (C) – Moderate Risk, Stable Returns
- Invests in corporate bonds that are considered high rated [for solvency and liquidity].
- Provides steady and safer returns.
3. Government Securities (G) – Low Risk, Safe Returns
- The government bonds, securities are taken up as Investment.
- It offers returns that are lower with protection of capital.
4. Alternative Assets (A) – High Risk, Potential Growth
- They also include REITs, invest in alternative investments (AIFs and other investment vehicle type) etc.
Investment Allocation Options:
- Active Choice: Always manually specify where the funds can be spent in E, C, G, and A.
- Auto Choice: Dynamic allocation based on age.
Withdrawal Rules in NPS
1. Withdrawal at Retirement (60 years)
- It is possible to withdraw 60% of the corpus tax free.
- An annuity for a regular pension must be bought with 40%.
2. Premature Withdrawal
- A restriction from 10 years that allows only up to 25% transfer of contributions by the side.
- It can be withdrawn for particular purposes (education, home purchase, medical emergencies).
3. Withdrawal on Death of Subscriber
- Entire corpus given to the nominee which is tax free.
NPS vs Other Retirement Plans
| Feature | NPS | PPF | EPF | Mutual Funds |
| Returns | 9-12% | 7-8% | 8-9% | 12-15% (Equity) |
| Tax Benefits | Yes (80C, 80CCD) | Yes (80C) | Yes (80C) | ELSS (80C) |
| Liquidity | Low | Moderate | Low | High |
| Risk | Moderate | Low | Low | High |
| Regulator | PFRDA | Govt of India | EPFO | SEBI |
Highlighting Risk and Flexibility
NPS benefits are good, but its constraints and risks should also be taken into account.
Lock-in Period: NPS is a long-term investment with withdrawals allowed only after 60 years (except in specific cases). In other words, it has lower liquidity than mutual funds, fixed deposits, etc.
Market Fluctuations: Returns on NPS investments are not guaranteed since they are market linked. Short-term volatility follows being exposed to equity.
Mandatory Annuity Purchase: At retirement, 40% of the corpus must be used to buy an annuity, which might offer lower returns than direct investments.
Tax on Annuity Income: While the 60% lump sum withdrawal is tax-free; the annuity income is taxable as per the investor’s income slab.
However, with these limitations, NPS is still a good choice if you have long term retirement planning to look forward to as it has flexibility, professional fund management and tax benefits.
Real Life Examples & Case Studies for NPS
Case Study 1: A Young Professional Strategy Planning for their Retirement
Rajesh Sharma, 30 years old, IT Professional, Investment: ₹5,000 per month in this shceme, Risk Appetite: Moderate (Mix of equity and debt)
At 30 years of age, Rajesh decides to start investing in NPS, with an Active Choice strategy, with a allocation of 50% of his amount in equity (E), 30% in corporate bonds (C) and 20% in government securities (G). He continues investing ₹5,000 monthly for 30 years.
- Total Investment: ₹18 lakh (₹5,000 × 12 months × 30 years)
- Expected annual return: 10%, which is the historical performance of a balanced NPS portfolio.
- Final Corpus at 60 years: ₹1.14 crore
At retirement:
- He withdraws 60% tax-free = ₹68 lakh
- The remaining 40% (₹46 lakh) is used to buy an annuity, giving him a pension of approx. ₹23,000 per month for life (assuming a 6% annuity rate).
Lesson: Rajesh invests early so that he can retire financially stable with market linked returns.
Case Study 2: Strategy of Government Employees to Maximize NPS Gains
Meena Iyer, 40 years old, Government Teacher Employer Contribution: 10% of basic salary (₹10,000 per month) Personal Contribution: ₹5,000 per month Investment Mode: Auto Choice (Aggressive till 35, Moderate later)
Meena, being a government employee, benefits from the employer’s contribution under Section 80CCD (2), reducing her taxable income. She invests until retirement at 60 years.
- Total Investment: ₹36 lakh (₹15,000 × 12 × 20 years)
- Expected Returns: 9% per annum
- Final Corpus: ₹1.2 crore
At retirement:
- 60% withdrawal (₹72 lakh) is tax-free.
- 40% annuity (₹48 lakh) gives her a pension of ₹25,000 per month.
- Her taxable salary during service was reduced, saving ₹50,000 per year in taxes.
Lesson: This scheme is an excellent tax-saving and retirement tool, especially for salaried employees with employer contributions.
Case Study 3: Using NPS and Mutual Funds to Secure an Early Retirement
Priya Menon, 35 years old, Private Sector EmployeeGoal: Retire by 55 with ₹2 crore corpus Strategy:
- NPS Contribution: ₹10,000/month (₹1.2 lakh/year)
- Mutual Fund SIPs: ₹20,000/month
Priya plans for early retirement at 55, so she invests in both NPS and mutual funds.
- NPS Expected Corpus at 55: ₹1.5 crore (at 10% p.a.)
- Mutual Fund Corpus: ₹2.5 crore (at 12% p.a.)
At 55:
- NPS withdrawal: ₹90 lakh (60% tax-free), ₹60 lakh annuity (~₹30,000/month pension)
- Mutual Fund SWP: ₹1 lakh per month
Lesson: It teaches people that combining this scheme with other investments like mutual funds can make it possible to retire early while securing pension.
FAQs About NPS
1. Can I have both EPF and NPS?
Yes, both EPF and NPS are investment options where you will be able to enjoy maximum advantages of corpus from retirement and tax.
2. Is NPS better than PPF?
It is lower in liquidity as it offers ( 7 to 8%) less than PPF (9 to 12%). If you want to get the stable return with tax benefits then PPF is recommended. If you like to grow more than using a more conservative plan allows, NPS is your best choice.
3. If I get pension from NPS then what will be the pension amount?
Your pension depends on:
(i) Investment amount
(ii) Fund performance
(ii) Annuity selection
The case where assume you are earning ₹1 crore and you invest in an annuity where you buy 40% of ₹40 lakh paying 6% per annum p.a, if your monthly pension would approximately be ₹20,000.
4. Is it possible to change NPS fund manager?
Turning to the truth, you can change fund manager of your scheme only once in a year.
5. Is NPS a good investment?
Yes, it is very ideal for long term retirement planning as it offers tax saving, market linked growth and post retirement income, which is very good for long term retirement planning.
Conclusion: Achieve retirement security through an investment in NPS today.
The necessity of retirement stands as a mandatory requirement. Securing your future should be on your top priority since costs are rising and life expectancy is growing. If one is looking for long term retirement planning, then the National Pension Scheme is among the best investment options available as it provides high returns, tax benefits and financial security.
It can help you build a strong financial foundation if you are a young professional just starting your career, salaried professional looking for tax saving option or an individual who wishes to have a secure post-retirement income.
Initiate your NPS journey at present rather than postponing it until retirement draws near. The more early you invest, the more financially stable you will be later. Your present actions to manage retirement will bring peace of mind along with financial stability through your upcoming years.
Open a NPS account right now to begin creating a retirement with no financial worries!
