Planning to invest in NPS? Top 5 reasons you should consider National Pension System

The National Pension System (NPS) has evolved over time, becoming more user-friendly and adaptable to the needs of investors. The Pension Fund Regulatory and Development Authority (PFRDA) has introduced new features and simplified the process of opening an NPS account, allowing individuals to do so online within minutes, provided they have the necessary documents. Additionally, the Finance Ministry has implemented tax benefits on contributions, including exclusive tax deductions for NPS investments and making 60% of the maturity corpus tax-free.

Consequently, the NPS is gaining momentum, with 8.73 lakh voluntary investors joining the scheme in 2023-24, translating to an average of 2,391 investors per day or nearly 100 every hour. Despite this growth, the NPS has only captured 10% of the total investing population in the country, with just 55 lakh voluntary investors.

Investors who overlook the NPS may be overlooking a valuable investment opportunity, states an ET analysis by Babar Zaidi. Rahul Bhagat, CEO of DSP Pension Fund believes that the NPS offers everything that one looks for in a retirement savings product. “It is a long-term investment with very low costs and a low risk profile."

Here are five compelling reasons to consider investing in NPS:

NPS: Higher Returns Due To Low Charges

NPS has remarkably low fund management charges compared to mutual funds and insurance companies. "The NPS is the cheapest product available in the Indian market," says Bhagat. Investors pay a mere Rs 30-90 per lakh annually, which is on par with ETFs offered by mutual funds and significantly lower than the 2-2.5% charged by actively managed equity funds.

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Although a 2% annual fund management charge may seem insignificant, it accumulates to a substantial amount over time due to compounding. For instance, if you invest Rs 5,000 per month through an SIP in a mutual fund with a 2% annual charge, you will pay approximately Rs 19 lakh in fund management fees over 25 years. In contrast, investing the same amount in the NPS, assuming the maximum fund management charge of 0.09%, will cost you only Rs 1 lakh over the same period, assuming a compounded annual return of 9%.

The low charges of the NPS result in higher returns for investors.

Consequently, NPS equity funds have consistently outperformed large-cap mutual funds over the past decade, and even the flexi-cap category by a narrow margin. For investors who prefer not to lock their money in the NPS until the age of 60, the NPS Tier II option offers the flexibility of investing without tax benefits on contributions and no restrictions on withdrawals. You can invest today and withdraw the money the next day without any exit charges.

NPS Tax Benefits

The NPS Tier II investments do not qualify for any tax benefits, but the Tier I option comes with several tax advantages. NPS offers three ways to save on taxes.

• Contributions to the scheme are eligible for deduction under Section 80C, subject to the overall limit of Rs 1.5 lakh.
• Additionally, there is a separate deduction of up to Rs 50,000 under Section 80CCD(1b), which is exclusive to NPS and over and above the Section 80C deduction. Taxpayers in the 30% bracket can save up to Rs 15,600 by investing Rs 50,000 in the scheme, effectively reducing their net outflow to Rs 34,400 (or Rs 2,866 per month) after considering the tax savings.
• The third tax-saving option through NPS has the potential to significantly reduce an individual's tax liability. Under Section 80CCD(2), up to 10% of an employee's basic salary contributed to NPS is tax-exempt. For instance, if an individual has a basic salary of Rs 50,000, their company can reduce a taxable emolument by Rs 5,000 and contribute that amount to the employee's NPS account every month. The annual contribution of Rs 60,000 to NPS through this method can lower the employee's tax by Rs 18,720. However, this NPS contribution should be a part of the individual's emoluments and can only be facilitated by the employer. It is worth noting that the deduction under Section 80CCD(2) is available even under the new income tax regime.

NPS Multiple Choices

NPS investors now have the option to select from 11 different pension fund managers. Additionally, they have the flexibility to switch their pension fund manager annually. Till last year, an NPS investor could invest in schemes of only one pension fund manager. However, it's important to note that the performance of these pension fund managers differs across the four available categories.

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Flexibility with NPS

NPS has introduced several changes to provide investors with more flexibility. One of the key changes is that investors can now modify their asset allocation up to four times annually. The most significant advantage is that "switching from one asset class to another or changing your pension fund manager will have no tax implications." In contrast, switching between mutual funds is considered a sale, and any gains are subject to taxation.

Moreover, the NPS has given investors greater autonomy in determining their asset allocation. Previously, there was a 50% limit on equity investments, which many investors found restrictive. However, this cap has now been increased to 75%, catering to the needs of younger investors and those with a higher risk tolerance.

Investors can continue contributing to the NPS until the age of 70. Furthermore, they have the option to postpone the withdrawal of the 60% tax-free portion of their corpus until they reach 75 years of age. This allows investors to take advantage of the NPS's low-cost structure well into their retirement years while still having the ability to make withdrawals from their accumulated funds.

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NPS Liquidity

NPS does not necessarily mean that your funds are inaccessible until you retire. Similar to the Provident Fund, the NPS allows withdrawals under certain circumstances, such as medical emergencies, marriage or education of children, and purchasing or constructing a house. However, there are some restrictions on these withdrawals.

To be eligible for withdrawals, you must have been an NPS subscriber for a minimum of three years. Additionally, you are only permitted to make withdrawals three times throughout the entire duration of your NPS account. One can withdraw up to 25% of the contribution in NPS at any time, excluding those made by one's employer.


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