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The National Pension Scheme (NPS) is a pension scheme administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The NPS aims to provide retirement income to all the citizens of India, including the unorganised sector workers, by encouraging them to save for their old age.

The NPS offers the following features and benefits to its subscribers:

  • A unique Permanent Retirement Account Number (PRAN) will be allotted to the subscriber and can be used from any location in India.
  • Two types of accounts: Tier I and Tier II. Tier I is a non-withdrawable account meant for savings for retirement, while Tier II is a voluntary savings account that can be withdrawn at any time.
  • The subscriber can also choose from different investment options and pension fund managers based on their risk appetite and return expectations.
  • NPS offers tax benefits under Section 80C, Section 80CCD(1B) and Section 80CCD(2) of the Income Tax Act, 1961.
  • The subscriber can withdraw up to 60% of the corpus as a lump sum at the time of retirement, while the remaining 40% has to be used to purchase an annuity that will provide regular income in the post-retirement phase.
  • Partial withdrawal of up to 25% of the contributions is allowed after 10 years of opening NPS for specific purposes such as higher education, marriage, purchase of a house, etc.

How Does NPS Work?

The NPS works as follows:

  • The subscriber has to open an NPS account with any of the Point of Presence (POP) or online through the eNPS portal.
  • A minimum contribution of INR 500 for Tier I and INR 1000 for Tier II at the time of account opening and subsequently at least once a year should be done.
  • The subscriber has to choose a pension fund manager (PFM) from among the eight PFMs appointed by PFRDA and an investment option from among four options: Active Choice, Auto Choice, Alternative Investment Fund (AIF) Tier I and AIF Tier II.
    • In Active Choice, the subscriber can decide the asset allocation among equity (E), corporate bonds, and government securities (G) with a maximum limit of 75% for equity for subscribers below 50 years of age and reducing thereafter.
    • In Auto Choice, the asset allocation is done automatically based on the subscriber’s age and risk profile with three options: Aggressive Life Cycle Fund, Moderate Life Cycle Fund and Conservative Life Cycle Fund.
    • In AIF Tier I, subscribers can invest up to 5% of their funds in alternative assets such as real estate investment trusts (REITs), infrastructure investment trusts (InvITs), etc.
    • In AIF Tier II, subscribers can invest up to 10% of their funds in alternative assets such as REITs, InvITs, etc.
  • The PFM will invest the funds as per the chosen option and generate returns for the subscriber over time.
  • The subscriber can switch between PFMs or investment options once a year for Tier I and Tier II accounts.

Is NPS a Good Investment Option?

The NPS is a good investment option for those who want to save for their retirement in a disciplined and regulated manner. The NPS offers several advantages, such as:

  • Low-cost scheme with minimal charges levied.
  • A flexible scheme that allows the subscribers to choose their own PFM, investment option and annuity provider.
  • A transparent scheme that provides regular updates on the performance and portfolio of the funds.

However, the NPS also has some limitations, such as:

  • A long-term scheme that requires the subscriber to stay invested until 60 or 65.
  • NPS is a market-linked scheme that exposes the subscriber to the risk of volatility and uncertainty of returns.
  • It is a partially taxable scheme that taxes the annuity income and the lump sum withdrawal above INR 2.5 lakh at the time of retirement.
  • The scheme mandates the subscriber to purchase an annuity with at least 40% of the corpus at the time of retirement.

Investing in the NPS is a secure choice as it is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures the best interests of subscribers. Moreover, the NPS offers diversified investment options, reducing the risk of financial loss.

The National Pension Scheme presents numerous advantages that make it a worthwhile investment. It provides tax benefits, flexible contribution and investment options, low costs, flexible annuity choices, and a safe investment environment. For individuals seeking to save for retirement and secure their financial future, the NPS is an excellent investment avenue.

However, it is important to note that the returns from NPS are subject to market performance and, therefore, cannot be guaranteed. Like any investment, it is crucial to understand the associated risks and seek professional advice before making investment decisions. Thus, consulting with a financial advisor can help in making an informed decision that aligns with one’s individual circumstances and retirement objectives.

Frequently Asked Questions

Is NPS necessary if I already have PF?

Having a PF alone may not be sufficient to maintain a comfortable retirement life as it provides only a limited pension component under EPS. Subscribing to NPS in addition to PF is a viable option. Additionally, there is a provision that allows the transfer of recognised provident funds to NPS.

NPS Vs SIP, which is better?

NPS and SIP, investors should define their financial goals and investment horizon. Mutual funds are suitable for short and long-term goals, offering higher returns and risk. NPS is ideal for long-term goals like retirement, providing stable returns and tax benefits. 
Read: NPS Vs SIP

Is NPS a better choice than PPF?

NPS has been known to generate higher average returns compared to PPF. Since it invests in market-linked instruments. Unlike PPF, NPS doesn’t guarantee any returns. The choice between the two largely depends on the investor’s preference, risk tolerance levels and financial goals.
Read: NPS Vs PPF

Can I have both PPF and NPS?

Yes, you can invest in both PPF and NPS simultaneously. However, the overall limit to claim under Section 80C will be INR 1,50,000 only. 

Is there a limit to investing more than INR 50,000 in NPS?

Yes, you can invest more than INR 50,000 in NPS. There is no upper limit or maximum investment ceiling for salaried employees. However, self-employed individuals are restricted from investing up to 20% of their gross income. Overall, you can claim a deduction of up to INR 1,50,000 for NPS contributions under Section 80C. Additionally, a maximum deduction of INR 50,000 can be claimed for NPS contributions under Section 80CCD.