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The National Pension Scheme or NPS provides a steady income source, attractive returns, and better tax* savings. It is a flexible and affordable retirement investment option with lower risks as compared to the other choices in the market2.
Having a suitable retirement plan is essential to balanced financial planning. Among the various available options, the National Pension System (NPS) presents many investment options and the flexibility to select pension fund schemes, simplifying the process of retirement planning.
The National Pension Scheme (NPS) offers an excellent option for those who wish to start planning for their retirement early and have a conservative risk tolerance. This article highlights six reasons why you must invest in NPS, a scheme launched by the Central Government of India.
What is NPS?
The NPS is a social security initiative accessible to employees across many sectors, except the armed forces. Similar to a retirement plan, this program encourages people to make periodic contributions to a pension account throughout their careers.
Upon retirement, you can withdraw a portion of your gathered savings, while the remainder is disbursed as a monthly pension. So, in case you are wondering “Should I invest in NPS?”, note that the NPS is regulated and overseen by the Pension Fund Regulatory and Development Authority (PFRDA).
It operates as a well-defined, voluntary contribution scheme, linked to the financial markets and managed by experienced fund managers.
Types of NPS Investment Plans
You will find two sorts of NPS accounts: Tier I and Tier II. Let us briefly understand both:
NPS Tier I: The Tier I account is mandatory and allows withdrawals only upon meeting specific exit conditions as outlined in the NPS regulations. Any Indian citizen between 18 and 65 can start an NPS Tier I account with a minimum investment of ₹500. Your funds in this account are lock-in till you turn 60. However, after the initial lock-in period of 3 years, you can partially withdraw funds (up to 25%of the fund value) from here for certain causes. When you turn 60, you can receive up to 60% of the maturity amount as a lump sum and rest must be used to buy an annuity plan.
NPS Tier II: On the other hand, the NPS Tier II account is voluntary and serves as an additional savings option for Tier I account holders, permitting them to withdraw their savings at their discretion. Any Indian citizen with a running Tier I account can open a Tier II account with a minimum investment of ₹1000. However, you will not get tax* exemptions on your Tier II account maturity amount unlike the Tier I account.
Why Invest in NPS: Top 6 Reasons
Acts as a Steady Income Stream
Investing in NPS guarantees a consistent monthly pension throughout your retirement years. When you reach the age of 60, your NPS matures, with 60 per cent of the accumulated funds automatically transferred to your bank account.
Similarly, you receive a monthly pension from the remaining 40 per cent of the corpus.
Attractive Returns and Interest
While a portion of NPS funds are allocated to equities2 (which may not offer guaranteed1 returns), it tends to provide higher returns compared to traditional tax-saving* investments like the PPF. The equity returns2 for 1 year of investment in NPS Tier 1 were reported to be between 15.33% and 18.8%, while for NPS Tier II, the returns for the same duration stood between 15.19% to 17.92%.
Flexibility
NPS subscribers enjoy flexibility in managing their investments, with the option to switch between different investment categories such as equities, government securities, and bonds. Therefore, investors with variable risk tolerance can choose an appropriate investment category. For example, an investor with a high risk tolerance can opt for a higher equity investment, while another with a lower risk appetite can include more government securities in their portfolio. Moreover, investors can also choose between Active and Auto modes for investing and decide how actively they want to participate in their investment’s journey.
Furthermore, subscribers can adjust the amount of their contributions and manage their accounts online from anywhere, even when relocating to a different city or changing employment.
Low Entry Cost
NPS allows individuals to begin investing with as little as ₹1000 per financial year. In fact, the minimum investment in NPS is ₹500 at the time of account opening.
This accessibility means that even people with modest incomes can initiate NPS investments and gradually build a substantial corpus.
Low-Risk Investment
NPS investments feature limited exposure to equity, with a maximum allocation of 75% towards equity shares or stocks. This lower equity exposure results in a less volatile response to market fluctuations, albeit with a more restrained profit-yielding capacity and capital appreciation.
Better Tax Savings
The NPS Tax-Saving* schemes offer an additional scope beyond the tax-saving opportunities available under the Section 80C.
You can claim tax deductions of up to ₹50,000 for your NPS investments under Section 80CCD (1B), in addition to the deductions available under Section 80C for investments up to ₹1.5 lakh. This enables you to save an additional ₹15,600 in taxes annually.
Final Thoughts
The National Pension Scheme is especially a good idea for those employed in the private sector and seeking a reliable pension income in their post-retirement years.
Besides NPS, there exist various strategies for cost savings through careful financial planning. For example, many insurance policies can be secured at lower premiums.
A suitable retirement plan for you and your partner offers you the freedom to fulfil your retirement goals. Retirement planning also provides multiple tax benefits that enable you to manage your investment expenses more effectively.
