Happy Retirement- All about NPS(National Pension Scheme)

9 min readNov 15, 2022

During our working years, we often dream of our ideal house, big cars, international vacations, big gadgets, latest phones and the list goes on. While running around in life and trying to fulfil all our dreams we often fail to think about life when the running has to slow down. When we reach our golden years we might not have the same levels of energy left to run around and earn money at the same pace. Earlier the Indian Government had an Old Pension Scheme to fund the retired Government employees post retirement in the form of monthly pension. But recently the Government decided to let the employees fund their own retirement. So the government came up with NPS (National Pension Scheme) in 2004 for government employees and in 2009 it was opened for the public. For private employees who don’t enjoy pension benefits, NPS can be an excellent way to safeguard our future.

Who is the regulatory authority for NPS?

Whenever an investment avenue opens, it requires a regulatory authority to make sure that it’s running smoothly without fraudulent transactions.

Like SEBI is the regulatory authority of capital markets, NPS is under the PFRDA (Pension Fund Regulatory and Development Authority). PoP (points of presence) are service providers hired by PFRDA to ensure people can operate on their NPS account without difficulties. When we register for NPS , the data is collected from POP and is given to the CRA( Central Record Keeping Agency) for verification and record keeping purposes. The money is then put into the pensions funds under the strict eyes of the PFRDA and NPS trust.

Who can open the NPS Account?

NPS Account can be opened by any resident Indian Citizen between the ages of 18–65 years.

How many accounts can open individual open?

Each individual can only open one account. It can’t be opened jointly but you can have nominees for the account opened.

Where are the funds invested?

The money invested in NPS is invested in different instruments based on choices made my the investor (explained in detail in a later section of the article).

There are 4 main asset classes where the funds for NPS are invested:

1. Asset class E: Equity market (money invested in equity market instruments)

RISK LEVEL: HIGH

2. Asset class C: Corporate bonds (money invested in fixed income markets except for Govt. securities)

RISK LEVEL: MODERATE

3. Asset class G: Government Securities ( money invested in Government securities)

RISK LEVEL: LOW

4. Asset class A: Alternate Investments (Investment in REITs(real estate), commercial mortgage based securities etc.)

RISK LEVEL: VERY HIGH

Based on the investment appetite of each investor , they can choose which asset class suits them the best.

Which are the funds registered under NPS?

The image attached below shows the list of funds which people can choose to invest in under NPS.

For more details regarding different funds under NPS refer to :

https://www.npstrust.org.in/content/pension-funds-registered-under-nps

If there is any confusion regarding which funds are best suited for NPS , these links might help in comparing between the different funds and the best performing fund based on performance:

1. https://www.etmoney.com/blog/best-nps-fund-managers-which-nps-fund-should-you-invest-in/

2. https://www.moneycontrol.com/personal-finance/nps-national-pension-scheme

3. https://cleartax.in/s/top-performing-nps-schemes

4. https://economictimes.indiatimes.com/marketstats/pid-402,filterby-tier,filtervalue-all,sortby-year1,sortorder-desc,pageno-1.cms

How to decide how much funds should go to each asset class?

Well people have different appetites for investment into different asset classes . NPS gives you the option to choose how much funds to be allocated in each asset. If you don’t want to make that choice actively, NPS also gives you an option to automate choosing the percentage of funds to be invested into different asset classes.

There are two choices that investors can choose for contributing the funds to NPS:

1. Active Choice:

In this option, investors have the option to choose how much of their total funds being invested would go into which instruments (E,G,C or A asset class) on their own. The fund managers will give a list of funds to choose from and investors can choose how much percentage allocation is to be done in each asset class .

2. Auto Choice:

If the investors don’t want to choose the option to actively manage their portfolio they have the option to let NPS allocate the funds automatically on behalf of the investors. The funds are invested in various life cycle funds and investors can choose from options based on their choice. (details given below)

A FEW POINTS TO NOTE:

In both these options, NPS allocates higher amount in equity while the investors are young. But as they approach the retirement age the portion of funds allocated in equity keeps going down so as to safeguard their retirement fund from market related uncertainties.
Upto the age of 50 years the maximum allocation an investor can have for equity is 75% of the entire portfolio.
After the age of 50, the maximum allowed percentage allocation in equity goes down as the age of the investor increases.
Percentage allocation to asset class A (alternate investment) cannot exceed 5% due to its risky nature
The total percentage allocation should be 100% which should include a mix of all asset classes- E,G,C and A.

ACTIVE CHOICE

Investors can actively choose their portfolio allocation in different assets with the upper limit on each asset class as mentioned below:

AUTO CHOICE

Investors can choose any one option from the list of options given below. You have the option to make your portfolio — aggressive, conservative or moderate based on your long term objective. Given below are the maximum allocation limit for each asset class in their lifecycle fund.

The allocation percentage for different assets in each lifecycle fund are as follows:

Choosing between active and auto choices might seem daunting to say the least if you are new to investment in general. I would suggest, as a beginner, start your NPS investment journey with auto choice and then you can switch over to active choice once you gain more knowledge about the markets.

Here are a few links that might help you gain more knowledge on active and auto choices in NPS:

Changing the choices after selection:

Once you select a choice or fund type its not written in stone. It can be changed upto twice a year.

Different types of NPS accounts — Tier 1 vs Tier 2 account

During account opening in NPS we are given the choice between opening a tier 1 or tier 2 account. Tier 1 account is basically a retirement account that has a lock in period for up to 60 years. For opening tier 1 account you shall need a minimum contribution of Rs. 500. Tier 2 account on the other hand is a savings or investment account which doesn’t have any lock in period. For opening a tier 2 account you shall need a minimum contribution up to Rs. 1000. The only issue with the tier 2 account is that investor shall not get any tax benefits in the tier 2 account as opposed to the tax benefits available in the tier 1 account. The major differences are mentioned below:

Differences between nps tier 1 and tier 2

NOTE: It’s important to note that for opening tier 2 account, an investor should already have a tier 1 NPS account.

For more detailed information on the differences between Tier 1 and Tier 2 account , these are a few links which might be helpful:

Withdrawal from the NPS:

Earlier the withdrawal from NPS was under the EEE(Exempt, Exempt , Exempt) category. Which means the principal amount invested and interest accrued could be withdrawn at maturity completely tax free. But now the category of the withdrawal has changed a little . NPS is now categorised under EET which means, upon maturity, withdrawal of partial amount is tax free but the rest of the amount is not. That depends factors like when the investor is withdrawing the amount from NPS. The details are mentioned below:

PARTIAL WITHDRAWAL:

Investors can partially withdraw some amount from NPS but with some caveats. These are mentioned below:

The investor/subscriber should have been an NPS investor for at least 3 years.
Withdrawal amount should not exceed 25% of contributions.
Withdrawal is only allowed for the following reasons:

a. Marriage or higher education of children

b. Medical emergency

c. Construction of residential house

NOTE: It’s important to note that investor can withdraw money from NPS only after 10 years have passed since account opening.

Also an investor can withdraw the money only thrice during the entire tenure .

TAX BENEFITS:

One of the main reasons why people start their investment journey into NPS is also because of the immense tax benefits it offers. These are a few points regarding the tax benefits of investing in NPS:

Investor can claim up to Rs. 2 lakh deduction under various sections:

a. Claim up to Rs. 1.5 lakh deduction under section 80CCD(1)

b. Claim up to Rs. 50,000 deduction under section 80CCD(1B)

2. There are no tax for any capital gains

3. However, the annuity you receive as a monthly pension shall be added to your income and taxed as per tax slab.

NPS Tax Calculator:

Not knowing how much money to invest and how beneficial NPS investments are, can make one very reluctant to start their investment journey in NPS.

You can check this NPS calculator link to check how much money you can accrue by your retirement — https://www.npstrust.org.in/content/pension-calculator.

You need to enter a few details like- date of birth, expected equity returns and monthly contribution etc. Although the real number might vary based on market conditions, taxations etc. But it can give you a vague idea about how much returns this investment instrument can give in the long run.

REFERENCES:

1. https://www.etmoney.com/blog/investing-in-nps-understanding-active-and-auto-choice/#:~:text=The%20difference%20between%20active%20choice,prefer%20a%20passive%20investment%20approach.

2.https://npscra.nsdl.co.in/download/Investment-options-under-NPS.pdf

3.https://www.icicidirect.com/ilearn/personal-finance/articles/nps-overview-of-active-and-auto-investment-choices

CONCLUSION:

The concepts of NPS discussed might seem like a lot to process initially. But once you start reading the concepts multiple times, you might gain a better idea about the investment styles under NPS. It’s never too late to start thinking about one’s retirement. And additionally start to save on taxes as well. There are loads of videos on Youtube about NPS as well. That might also provide a better insight into understanding NPS better. Attaching a few links below that would be helpful:

1. https://www.youtube.com/watch?v=T_NIXo3q09c

2. https://www.youtube.com/watch?v=2cKsynx3x0Q

I shall write another blog on the account opening process for NPS in different modes and bank accounts. If this article was helpful , please let me know in the comments. That would help me create better content.