NPS

National Pension System Returns

Dec 23, 2020 Alankit

National Pension System (NPS) is a pension cum investment scheme introduced by the Indian Government to help people create retirement corpus for old-age benefits. Any Indian resident between 18-60 years of age is eligible for the voluntary scheme. The long-term investment scheme ensures fixed returns after the end of the investment tenure.

NPS Returns are distributed to the subscribers by the NPS Pension Fund Managers. There are 8 different Pension Fund Managers (PFMs) in the NPS, based on the asset groups - Corporate Bonds, Government Bonds, Equity, and Alternate Assets. The strNPS rate of returns depends on the asset allocation and PFM selected by an investor. The earlier one starts contributing to the scheme, the more returns they will have. The Compounding rate for NPS returns is not pre-stabilized, returns can be determined with the help of the Compounded Annual Growth Rate of each asset over time.

Tier-I NPS Returns available on the following assets:

Assets	1-year return	1-year return	1-year return	1-year return
Equity	3.69%	9.59%	8.70%	9.15%
Corporate Bonds	13.59%	9.00%	10.34%	10.31%
Government Bonds	20.28%	10.29%	11.56%	10.15%
Alternative Assets	9.89%	N/A	N/A	7.67%

Tier-II NPS Returns available on the following assets:

Assets	1-year return	1-year return	1-year return	1-year return
Equity	3.69%	9.59%	8.80%	9.15%
Corporate Bonds	13.01%	9.00%	10.34%	10.31%
Government Bonds	18.83%	10.13%	11.44%	10.31%

Who should Invest in NPS?

Any Indian citizen between 18-60 years of age who wants to build a retirement corpus via systematic investment should invest in National Pension System. A single investor can continue to invest in this investment scheme as many times they switch their jobs. This financial tool does not have the risk appetite to invest in market-based policies like Mutual Funds, IPOs, etc. NPS is a systematic investment plan and hosts a lot of benefits for its subscribers.

Features and Benefits of National Pension System

Tax Exemption: The amount invested in the National Pension System is tax-free, whereas the amount withdrawn according to Section 80CCD of the Income Tax (IT) Act is tax exempted. Below-listed are the two categories for the tax calculation on the withdrawn amount of NPS returns:

80CCD (1):

Under this section, the self-contributed amount on the NPS is covered. The maximum deductible amount is 10% of monthly earnings for salaried individuals whereas 20% of the gross income for self-employed individuals.

80CCD(2):

This is applicable to the employer’s contribution towards the NPS amount. The maximum tax exempted amount under this regulation can be the total NPS contribution made by an employer, 10% of basic salary + DA + or total gross income (whichever counts the lowest. Self-employed individuals are not eligible to avail of benefits under this section Moreover, tax exemptions can also be claimed on any additional self-contribution under Section 80CCD(1B) given the invested amount is less than or equal to INR 50,000. In total, NPS returns attract tax exemption of up to INR 2.5 Lakh overall. .

Returns: Returns on NPS investment

are considerably higher in comparison to other long-term tax-saving investments like Public Provident Funds. A portion of invested funds goes to equities, enabling NPS to outperform other forms of investment options.

National Pension System has been in effect for over 10 years and has successfully delivered a fixed 8% to10% return every year since its inception. Also, investors have the freedom to change their Fund Manager if and when they require a different investment portfolio for their funds.

The National Pension System offers two investment options:

Auto choice: The Auto choice assesses the age of an investor and calculates the risk portfolio automatically. For example, investors nearing old age would prefer less risky investment options that enable guaranteed returns while investors at a young age can utilize options that are risk-associated.

Active choice: This option allows investors to select investment options and split their funds accordingly to reap the benefits of substantial returns.

The risk associated with NPS is considerably low as the equity composure is capped at 50% to 75% for all NPS return rates despite the higher earning potential. Once an investor crosses 50 years of age, the equity portion gets reduced by 2.5 % annually. During market volatility, it safeguards the funds and stabilizes the risk-return equation to assist investors.

Exit Rules: NPS enables its subscribers to continue investing until they reach 60 years of age, after which they will be eligible to withdraw the entire investment corpus.

It is obligatory for investors to maintain at least 40% of the total invested corpus in the NPS fund to avail of a regular pension post-retirement. However, investors are eligible to withdraw 25% of the total corpus after contributing to the pension fund for a minimum 3 year period. Throughout the investment tenure, one can make 3 withdrawals from NPS Tier-I Account, each within a minimum 5-year period gap. NPS Fund can be withdrawn to pay for medical requirements for self or for dependents, to pay for their children’s higher education, to buy or build a house.

To conclude, NPS is one of the most reliable investment options for retired Indian individuals as it offers considerably high NPS returns. The voluntary-contribution scheme helps investors build a substantial corpus to enjoy post-retirement.