NPS - National Pension System (NPS)

NPS like other EPF & PPF schemes which are low in risk with lower interest rate earnings, Government bodies came up with NPS in the year 2004, as a first step towards instituting pension reforms, where the investor will have decision rights where to invest their money with which ratio. To attract more investors government announced a separate section of deduction over Rs. 50000/ in the budgeting planning of the year 2015. This is over and above the section of 80C limit of Rs. 1.5 lakh (under section 80CCD) this means that if you are in a 30% tax slab you can additionally save Rs. 17000/- per annum by investing in NPS.

Why NPS - 

 To enjoy the second inning of life you must have a good corpus as a retirement fund. In the past decade, the government has been taking complete ownership of pensions to government employees however after 2004 they decided that all individuals to do it by themselves and from 2009 it was extended to all individuals of Indians Employed or businessmen. The message was very clear and loud you save for your retirement. To have support like RBI backed to banks SEBI backed to Stock exchange in similar approach PFRDA bodies formed to regulate and govern this investment which is Pension fund regulatory and development authority.

Disciplined Saving is a must for this NPS 

Vigilant Investment - 

Building a sufficient retirement corpus - 

NPS trust.org you can go and calculate your pension by investing disciplined money for your remaining year (60-current age).

Your investment spread across E C G A there are different kinds of risk attached to this ratio.

Alternative Investment  - Very High, 

Government Bodies - Low 

Corporate Bonds - Moderate 

Equity - High 

What does that even mean and how risk are associated with each class -

Class E: Equity (This category is directly linked to market performance as the investment is in passive mutual funds like an index fund and ETF. In the long run, this category has greater potential for higher returns)

Class C: Corporate Debt (This category invest in buying corporate bonds at a specific interest rate. Hence, this is less risky as compared to equity but the returns are comparatively lower)

Class G: Government Security (This category buys government bonds at a specific interest rate. Hence, this is less risky as compared to equity but the returns are comparatively lower)

Class A: Alternative investment (This category invest in alternative options like property and infrastructure projects)

An investor has 2 options to choose the category: Either by automatic mode or by active mode.

1. Active 
2. Auto

In Active choice you can decide your own asset mix, If you are likely to take High risk you can choose to have maximum exposure to E class wherein contribution of  75% is capped, If you are Low risk taking personnel you can choose maximum 100% allocation to Corporate and Government Bodies, Or if you want to add a very high risk into your contribution then you can have a maximum of 5% under Alternative location.

In Auto Choice, you can choose an aggressive life cycle fund, Moderate Life cycle or Conservative Life cycle fund. These types of classes are defined based on your age and considering the best interest of risk-taking your investment spread across to a standard allocation.

For Aggressive Life cycle :

Take an example if you’re age is up to 35 then the following allocation will work:

Under Asset Class E a total of 75% 

Under Asset Class C upto 10% 

Under Asset Class G 15% 

While if you’re in the age of 45 this ratio will change in an auto class by following ratio.

Under Asset Class E a total of 35% 

Under Asset Class C upto 20% 

Under Asset Class G 45% 

For Moderate Life Cycle with same age the ratio will reduce to moderate level.

Under Asset Class E a total of 50% 

Under Asset Class C upto 30% 

Under Asset Class G 20% 

While if you’re in age of 45 this ratio will change in auto class by following ratio.

Under Asset Class E a total of 30% 

Under Asset Class C upto 20% 

Under Asset Class G upto 50% 

For Conservative Life Cycle with same age the ratio will reduce to moderate level.

Under Asset Class E a total of 25% 

Under Asset Class C upto 45% 

Under Asset Class G 30% 

While if you’re in age of 45 this ratio will change in auto class by following ratio.

Under Asset Class E a total of 15% 

Under Asset Class C upto 25% 

Under Asset Class G upto 60% 

You can switch Auto to Active twice in any financial year.

Exit Terms

Exit before the age of 60 Years :

• Upto 20% of corpus can be withdrawn in lump sum
• Balance amount needs to be invested in Annuity 

(If Total corpus is less than or equal to Rs. 1 Lakh, there is no capp, Entire amount can be withrawan in lump sum)

Exit at the age of 60 Years:

• Upto 60% of corpus can be withdrawn in lump sum
• Balance amount needs to be invested in Annuity 

(If Total corpus is less than or equal to Rs. 2 Lakh, there is no capp, Entire amoutn can be withrawan in lump sum)

In both the term Atleast 10 years should have passed since the account were opened. 

But there are certain norms which can allows you not to exit the NPS subscription but can withdrawan a partial/certain amount 

If you have spent at least for 3 years

If you are requesting max of 25% of the total contribution

Maximum of three times during the entire tenure. In a specific reason like 

Higher education of children

Marriage of children 

Purchase/Construct the House or 

Treatment of critical illness

Broadly there are two types of account which any individual can open

Tier I:

• Investment is locked till the age of 60 years and hence this category is for retirement.
• Partial withdrawal is allowed only after 3 years. Maximum 25% can with withdrawn.
• This category is tax exempted. Minimum initial investment is Rs 500 and annual minimum investment is Rs 1,000 and there is no upper limit.

Tier II:

• There is no lock-in on investment in this category. Hence, you don’t have to wait until the age of 60 years. The amount can be taken out at any point in time.
• However, the tax exemption is up to 1.5 lakh under 80C and does not provide additional tax saving of Rs 50,000 under 80CCD which is provided by Tier I.
• Even the returns from the tier II category are taxed as per the slab.

NPS is a type of hybrid mutual fund with a mix of equity and debt allocation. While most of you would be thinking that if it is really a hybrid mutual fund, we can also invest ourselves in equity funds for the long term and do not need NPS. But the best apart from NPS is tax deduction up to Rs 50,000 under 80CCD which saves more than Rs 15,000 if you fall under 30% tax slab. 

Why one should not go for Mutual Fund as retirement plan in comparision with NPS Because most of the investors lack discipline while investing. They end up breaking their investment in between which results in reduced retirement corpus. The entire motive behind NPS is to create a retirement fund. Hence, it makes sense to have some restrictions on withdrawal. Moreover, this is government-sponsored hence there is a level of trust.

In my view :

The main issue to consider is that the returns of the NPS scheme are influenced by market fluctuations. Inquiring about the return of NPS will typically yield an answer ranging from 10% to 14%, indicating that it is not a fixed rate and could potentially drop below 10%. On the other hand, LIC Pension schemes offer fixed returns regardless of market changes, with the added security of being supported by the Government of India.

Taking risks with your monthly income after retirement is not a characteristic of a wise investor. In LIC Pension Schemes, although the returns may be lower, they are stable. This is especially important in uncertain times like the COVID-19 pandemic, where market returns can plummet to zero or even turn negative. However, if you are already filled with 80C total exemption you can go with NPS as most of the tax-saving options fall under 80C up to Rs 1.5 lakh, NPS offers additional tax savings up to Rs 50,000 under 80CCD(1B). This feature makes NPS stand out from the rest of the investment options. For example, a person falling under a 30% tax bracket can directly save Rs 15,600 (including cess). That’s straight away saving!

The information provided is solely for informational purposes; please refrain from interpreting it as legal, tax, investment, financial, or any other form of advice.