Back View more blog posts

Is NPS a good retirement product? Learn the key features!

Planning for retirement can be a daunting task. This is why there are retirement-focused investment products that enable you to financially secure your future!

One such product is the National Pension Scheme (NPS). In this article, we will discuss the key features of NPS and why it is considered a useful tool to save for your golden years.

What is NPS?

In simple terms, NPS is a pension scheme that allows you to contribute during your working years to your pension account.

The money is invested in various asset classes to generate a pension corpus, which can be redeemed when you turn 60 or retire.

NPS Account Types

There are two types of NPS accounts: Tier 1 and Tier 2.

The Tier 1 account is mandatory for retirement savings and offers tax-saving investments. When you open this account, you receive a Permanent Retirement Account Number (PRAN).

On the other hand, Tier 2 accounts are optional, and you can invest and redeem at any time. Tax advantages given to Tier 1 are not available in Tier 2.

Further, there are different options available under NPS:

1) Two approaches: Active or auto fund management

2) Four asset classes to choose from: Equity, debt, government securities and alternative investments

3) Different fund managers

Asset Classes

NPS invests in 4 different asset classes

1. Asset class E – Equity and related instruments
2. Asset class C – Corporate debt and related instruments
3. Asset class G – Government Bonds and related instruments
4. Asset Class A – Alternative Investment Funds. This includes instruments like CMBS, MBS, REITs, AIFs, InvITs, etc.

Asset Allocation

When it comes to the NPS, you have two options for asset allocation: Active Choice and Auto Choice.

Active Choice: allows subscribers the freedom to determine how their investments are distributed among various asset classes. However, there are certain sub-limits that apply.

For example, the maximum allocation allowed towards Alternative Investment Funds (AIFs) is capped at 5%. Additionally, for NPS, individuals are permitted a maximum equity exposure of 75% until the age of 50 years.

Auto Choice: offers a more automated approach to asset allocation. This strategy is based on the principle that as individuals approach retirement, their primary focus should be on safeguarding their wealth by minimizing overall portfolio risk.

Auto Choice achieves this objective by automatically adjusting the asset allocation of an individual’s portfolio based on their age. The underlying idea is that the allocation of assets should be adjusted over time to align with an individual’s changing risk tolerance and investment goals as they progress through different stages of their life.

Pension Fund Manager

Upon opening an account, selecting a Pension Fund Manager is important. The chosen manager will then take care of investing your funds into a variety of asset classes.

Tax Savings in NPS

Tax saving is available for individuals who are employed and contributing to NPS. The tax benefits can be enjoyed on both their own contributions as well as their employer’s contribution.

Section 80CCD (1B) offers an additional deduction for NPS investments up to Rs. 50,000, which is over and above Rs. 1.5 lakh available under section 80C of the Income Tax Act, 1961.

Opening an Account

You can open an account with NPS completely online by visiting the official website. To open an account, you must meet KYC (Know Your Customer) requirements, which can also be completed online.

Lock-in Period

NPS comes with a lengthy lock-in period. Investors can only exit NPS at the age of 60, making it a long-term commitment.

For example: if someone starts investing in NPS at the age of 30, they will have to wait 30 years before being able to exit the plan.

Redemption at Retirement

You can withdraw up to 40% of your accumulated wealth without paying taxes.

However, the max amount you can withdraw at retirement is 60%, and the remaining 40% must be used to purchase an annuity that provides a monthly pension to the subscriber.

Premature Withdrawal

If you withdraw from NPS before age 60 or retirement, the amount withdrawn won’t be taxable.

However, only 20% of the accumulated wealth in the NPS balance can be withdrawn, and the remaining 80% must be used to purchase an annuity that provides a monthly pension to the subscriber.

The annuity income received is taxable in the year of receipt, based on the subscriber’s applicable income tax slab rate.

Advantages of NPS

• Provides additional tax benefits
• Enables diversification of investments across various asset classes like equity, debt, etc.
• Offers lower fund management costs
• Allows contribution to a pension from an early age

Disadvantages of NPS

• Lengthy lock-in period
• No guaranteed returns like PPF and other similar investment options


In conclusion, the National Pension Scheme (NPS) is undeniably a useful product for retirement planning.

However, it’s important to remember that every investment product comes with its pros and cons.

It is crucial to choose your investments wisely, considering your risk profile and long-term financial goals.

While we have you here, did you know that MProfit helps you auto-import & track all your investments including NPS in one place?

Sign-up for a free trial now at the link below:
Sign Up | MProfit

15 May, 2023