National Pension Scheme (NPS) Decoded

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🤔 What is NPS?

The NPS is a market-linked voluntary retirement scheme, managed by the professional fund managers. It was introduced by the Government for public employees in 2004 and later in 2009 for all the citizens of India (except for the armed forces). The objective of the scheme is to create a retirement corpus or old-age pension.

Structure of the Scheme?

📈 Equity: Invests predominantly in Equities.
💰 Corporate bonds: Invests in bonds by PSUs, PFIs, etc.
💰 Government Securities: Invests in gov. securities.
🏢 Alternative assets: Invests mainly in REITs, InvITs, etc.

Two Choices of Asset Class Allocation

☝🏼 Active Choice: Choose the allocation percentage in each category, with a maximum ceiling of 75% on equity exposure, based on age, job type, etc.
✌🏼 Auto Choice: NPS offers various portfolio options (aggressive, moderate & conservative) depending on the age profile.

Reasons to Invest in NPS

👉🏼 Flexibility: Free to choose & change fund managers as well as investment options.
👉🏼 Market-linked Returns: Since NPS also has equity, it can offer higher return than traditional tax-saving options.
👉🏼 Tax Benefit: In addition to ₹1.5lacs in 80C, investment made in the NPS scheme may provide a tax deduction up to ₹50k.
👉🏼 Partial Withdrawal: After 3 years, subscribers can withdraw up to 25% of contributions for certain specified purposes, with a maximum of 3 partial withdrawals in the entire tenure.
👉🏼 Combo of Lump Sum and Annuity: After age 60 or retirement, one can redeem up to 60% of the accumulated corpus (tax-free), and the rest of the amount gets converted in annuity with a monthly pension that will be taxed at a normal rate.
👉🏼 Professionally Managed: NPS is managed by experienced pension funds like HDFC, ICICI, Kotak, SBI, etc., as per the guidance provided by PFRDA.

💡 The NPS can be a better investment option for those who are looking for a lump sum amount after retirement and a recurring monthly income thereafter.