Invest in NPS….Reality vs Myths!

It is true that NPS provides up to Rs.2 L tax exemption, under different tax clauses, but before we decide if this is the only consideration one needs to have while investing in NPS, we need to understand the scheme itself in some details.

  1. What is NPS (National Pension Scheme)?

The National Pension Scheme is a social security initiative by the Central Government. This programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces. The scheme encourages people to invest in a NPS account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus the remaining amount is paid as a monthly pension post retirement. NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs.

Features & Benefits of NPS

  • Returns/Interest:

A portion of the NPS goes to equities investment and so far the scheme has delivered 8% to 10% annualised returns.

  • Risk Assessment The risk management system of the scheme is well designed to take care of interests of investors. Currently, there is a cap in the range of 75% to 50% on equity exposure and  the equity portion reduces by 2.5% each year beginning from the year in which the investor turns 50 years of age. However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investor. The earning potential of NPS is higher as compared to other fixed-income schemes.
  • Tax efficiency – NPS tax benefit

Investment in NPS is tax efficient, the exemption is provided under section 80C/ 80CCD(1) and sec 80CCD(2) for different class of investors. The scheme, allows a tax deduction of up to Rs 2 lakh in total. Rules are a bit complex and apply differently to individual and corporate tax payer, also total amount of Rs.2L can be claimed in two parts under different tax sections.

  • Withdrawal Rules After 60 Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. The remaining 60% is tax-free now.
  • Early Withdrawal and Exit rules

Scheme allows for early withdrawal, with conditions. If you have been investing for at least three years, you may withdraw up to 25% for children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal for up to three times (with a gap of five years) in the entire tenure.


So, having understood, in brief, about the scheme, can we say that NPS is Good Tax Saving instrument?

The correct answer is yes & no; yes, if one also understands one critical and important element of the scheme – the long-term lock in, under normal course money under NPS can only be withdrawn after retirement, age of 60 years, that too only partly.

It may be correct to say that NPS, in true sense, is a retirement financial planning investment with tax benefit incentive.


While dealing with this it my also be helpful to address some of the other myths and doubts:

Common questions and doubts answered:


  1. Is NPS an annuity / pension scheme: In true sense, NPS is a saving scheme for retirement, which accumulates a corpus during the working life of an individual and the accumulated amount is compulsory invested, in part or full, as per the rules of the scheme, in a pension plan of authorised insurer.
  2. Is the scheme completely safe, given that it is for post-retirement: It will be incorrect to assume that any financial instrument or investment is 100% risk free, but scheme has well defined risk management process, but like any financial investment it does require investor to make oneself aware of risks associated, based on individual risk appetite.
  • It has long lock in period, how are emergencies handled?: Any retirement scheme has to have a long lock in to ensure availability of funds post retirement and also to provide superior returns. NPS has defined early exit rules and conditions associated.
  1. How do returns compare with other schemes: Given exposure to equity that scheme is allowed and long lock in period, scheme is designed to provide superior returns and historically, thus far it has provided reasonable returns compared to benchmarks.
  2. How is the tax treatment: It’s Exempt – Exempt – Exempt scheme, it provides exemption under 80C/80CCD1/80CCD2.


Summing it up

NPS is a well-designed investor friendly scheme, with focus on post retirement financial wellbeing on individual. Its recommended for specific purpose and for reasonable return over the tenure of the scheme. Hence, consider investing in NPS scheme if the benefits elaborated above match your risk profile and investment goal.