National Pension System (NPS): Should You Invest?

The National Pension System, or NPS, is an effort of the Indian government that aims to give Indian citizens retirement benefits. It encourages people to invest regularly during their working term for retirement.

Earlier, it was called the National Pension Scheme. In this scheme, you invest a lumpsum or fixed amount of money every month. Then, at your retirement, you can withdraw up to 60% of the accumulated amount, and the rest 40% you will receive in monthly payments. However, if the accumulated amount is equal to or less than INR 5 lakh, then the depositor can withdraw the entire amount at the time of retirement.

What is National Pension Scheme

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which comes under the jurisdiction of the Ministry of Finance, Government of India.

Under NPS, individual savings are pooled into a pension fund and invested by professional fund managers according to the approved investment guidelines. On behalf of investors, the PFRDA-regulated pension fund managers invest the fund across diversified portfolios, including equity, corporate debt, government bonds, and alternative investments. When subscribers open an NPS, they are issued a unique Permanent Retirement Account Number (PRAN) by a Central Record Keeping Agencies(CRA). The PRAN is mandatory to make contributions to Tier I and Tier II NPS accounts. These are long-term saving options, backed by the Government of India. Though it is a market-based plan, it is safe as it is regulated and cost-effective.

Features of NPS

1. The main objective of the NPS is to provide old-age pensions to the citizens of India. Initially, the NPS was solely available to employees of the central government; however, PFRDA opened it up to all Indian citizens.
2. It is regulated by PFRDA, which the government of India established.
3. The contribution made by the investor during their work life is invested under different asset classes.
4. Investment in NPS provides various tax benefits under the Income Tax Act.
5. Contribution to NPS provides flexibility as an investment can be made every month.

Types of NPS Accounts

Under the National Pension Scheme, there are two types of accounts:

1. Tier 1
   
2. Tier 2
   
   Let’s analyze both of the NPS accounts.

Tier 1 Account

A Tier 1 account serves as a primary account with tax advantages. To keep this account operational, an investor must contribute at least INR 1,000 a year.

Furter, the investments in a tier 1 account are locked until you turn sixty. Partial withdrawals, however, are permissible in certain circumstances, such as life-threatening diseases, etc.

Tier 2 Account

It is not mandatory for an individual to register for a Tier 2 account; withdrawals from tier 2 accounts are flexible. However, to open a Tier 2 account, you must first have a Tier 1 account. Although this account offers cheaper account maintenance fees, it does not provide the same tax benefits as a tier 1 account. We will discuss the tax benefits of NPS later in this blog.

Particulars	Tier – 1	Tier – 2
Tax Benefits	Available	Not available
Premature Withdrawal	Not available	Available
At Maturity	Investors can withdraw up to 60% of the accumulated amount, and the remaining 40% will be received in an annuity plan.	Annuity plan is not available in this. Investors can withdraw the entire amount.

The Asset class of NPS

The amount pooled from the investors under NPS is invested among 4 different asset classes.

1. Equity – In this, your money is invested in market-linked securities. They are volatile in the short run but generally give higher returns as compared to other asset classes.
2. Government Securities – Under this, the amount is invested into fixed-income securities issued by the government of India which carry the lowest risk.
3. Corporate Debt – This asset class carries a moderate amount of risk and invests in securities issued by corporate houses such as bonds, certificate of deposits, etc.
4. Alternative Investment Fund – Under an AIF, the pooled amount is invested into REITs (Real estate investment trusts, InvITs (Infrastructure investment trusts), and MBS (mortgage-backed securities), etc.

Choice of Asset class in NPS.

Investors have two options available to choose between asset classes in NPS

1. Active Choice – You can create your portfolio through active asset class selection, so if you’re ready to take on more risk and are seeking greater returns, you can choose equity as a major asset class, up to a maximum of 75% until you’re 50 years old.
2. Auto Choice – It provides you with the ability to automatically allocate your portfolio if you are unfamiliar with the idea of asset classes. Whereby your investment will expand in a less risky asset class as you age.

Tax Benefits of NPS

Investors contributing to the NPS are entitled to receive certain tax deductions. Let’s have a look at it:

1. Under Section 80CCD(1), subject to a maximum of INR 1.5 lakhs, the employee can avail of a Tax deduction of up to 10% of their pay (Basic + DA).
2. Tax deduction of up to INR 50,000 under Section 80CCD(1B) for employees; this deduction is over and above the INR 1.5 lakhs deduction under Section 80CCD(1).
3. Under Section 80CCD(2), the Employer’s contribution towards the Tier -1 NPS account of an employee is eligible for a tax deduction of up to 10% of pay (Basic + DA) or 14% of salary if such a contribution is made by the Central Government.
4. Self-employed people can claim a tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of INR 1.5 lakhs under Section 80CCE.

Pension Funds under NPS

As of May 2024, there are 11 pension fund managers registered under PFRDA under the Equity Tier 1 category, the names and performance of which are mentioned below:

Pension Fund	CAGR (3Years)	CAGR (5 Years)	CAGR (Since Inception)
Aditya Birla Sun Life Pension Management Ltd.	17.82%	15.96%	14.51%
Axis Pension Fund Management Limited	NA	NA	20.21%
HDFC Pension Management Co. Ltd.	18.14%	16.37%	15.68%
ICICI Pru. Pension Fund Mgmt Co. Ltd.	19.63%	16.70%	13.37%
Kotak Mahindra Pension Fund Ltd.	19.08%	16.63%	12.65%
LIC Pension Fund Ltd.	18.83%	15.79%	13.89%
Max Life Pension Fund Management Limited	NA	NA	17.77%
SBI Pension Funds Pvt. Ltd	17.78%	15.17%	11.70%
Tata Pension Management Pvt. Ltd.	NA	NA	23.19%
UTI Retirement Solutions Ltd.	19.18%	15.94%	13.18%
DSP Pension Fund Managers Private Limited	NA	NA	5.55%

Eligibility for NPS

There are 4 kinds of eligibility criteria under the NPS model.

1. All Citizen Model – All Indian citizens, whether they are residents or not, as well as foreign nationals between the ages of 18 and 70, are eligible to subscribe to the NPS under this model. However, individuals of Indian descent and Hindu Undivided Families are not eligible.
2. Central Government – The central government employees who have joined their services after 1 Jan 2004 except for the armed forces need to mandatorily join NPS.
3. State Government – Employees of state government and union territories are covered under NPS.
4. Corporate Model – The corporates established under the Companies Act 2013, cooperative societies, partnership firms, trusts, etc. if registered with PFRDA, then they are eligible to open your NPS account.

Why is NPS a good retirement choice?

• Backed by the Government of India: The NPS is a government savings scheme. NPS is a market-linked investment product specifically focused on retirement solutions and comes with a lock-in of 60 years of an individual’s age.
• Cost Effective: It is one of the lowest-cost retirement products.
• Well-regulated and Transparent: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which protects investors.
• Risk & Safety: NPS is market-linked and a bit risky, but PFRDA strictly regulates it, so there is almost no chance of malpractice. 
• Returns: NPS can give up to 9% -12%.
• Tax Benefits: NPS provides a total tax benefit of up to Rs. 2 lakhs under Section 80C and Section 80CCD.
• Flexible Investment alternatives: A saving option where individuals can decide the contribution amount and when to contribute.
• Disciplined Saving Approach: It’s a systematic saving plan to fund retirement expenses, promote financial discipline, and prepare people for retirement.
• Professional Fund Management: Professional fund managers with sound investing knowledge handle the pooled investments.

How to Check the Balance in an NPS Account?

First, a subscriber must go to the CRA website and enter their login information, such as their assigned ID and PRAN number, to access their NPS account. After logging in, go to the holding option under the transact section.

In addition, the government-launched UMANG (Unified Mobile Application for New-age Governance) platform, which makes it easier for you to monitor your NPS contribution.

Conclusion

National Pension System or NPS is an option for people who want to plan their retirement and are searching for peace of mind throughout their retirement years by having the security of a regular income governed by government agencies. The ability to invest in NPS every month gives you the freedom to build up a sizeable sum by the time you retire.

However, as we always advise, before making any investing decisions, research thoroughly and consult with your financial advisor.

Frequently Asked Questions (FAQs)