Are you looking for an investment that allows you to grow your hard-earned money with market-linked returns without exorbitant fees while enjoying tax benefits? If so, the National Pension System (NPS) is the solution that meets all of your requirements.
With its numerous advantages, NPS should be the go-to option for anyone planning retirement. Yet, very few people have taken the plunge. If you overlook such a golden opportunity, here are five reasons why you shouldn’t.
Long-Term Investments with Restricted Withdrawals
A penny saved is a penny earned, but you earn much more than a penny when it is compounding. Keeping your investments in long-term products allows interest to earn interest.
NPS is one such investment that encourages you to stay invested for the long term without withdrawing your money too soon.
To discourage early withdrawals, a higher minimum annuity requirement before age 60 is in place. While this may feel like a hindrance during the accumulation phase, it is important to remember that the purpose of this product is to help you accumulate funds for your old age. Therefore, strict measures that limit early withdrawals are necessary.
Your patience will pay off when investing in long-term products. Keep this in mind when you are saving for retirement.
Additionally, the long-term nature of NPS allows fund managers to adopt a stable, long-term perspective, minimising disruptions from short-term market fluctuations.
NPS Guarantees a Regular Income Post-Retirement
One of the biggest fears retirees face is running out of money. With NPS, you don’t have to worry about that.
Most financial instruments, such as fixed deposits, mutual funds, or insurance, provide a lump sum payout at maturity. One of the most significant drawbacks of a lump sum payout is that individuals tend to spend it immediately for other financial goals, such as a child’s education or marriage, rather than keeping it for themselves. As a result, they are left with a smaller corpus for post-retirement.
NPS puts a cap on amount you can withdraw at the age of retirement. Earlier you could only withdraw 60% of your total corpus.
But under the new 2026 rules, you can now take out up to 80% of your NPS money as a lump sum when you retire at 60, provided your total savings are more than ₹12 lakh. Also, while you can withdraw more at retirement now, the tax-free limit remains at 60% of the total corpus, so that extra 20% you withdraw will likely be taxed based on your current income slab.
This annuity option in NPS ensures that you have a steady income even after retirement. You can also allocate more than 40% of your corpus to annuities.
The available annuity options are quite attractive, ranging from a lifetime annuity to an annuity with a return of capital or an annuity for both husband and wife. Remember that annuity income is taxable, a major concern for many NPS investors. However, many individuals may not fall into high tax slabs after retirement.
NPS: Low Charges, High Returns
Unlike mutual funds and ULIPs, which charge high fund management fees, the charges associated with the NPS are lower. In fact, NPS is one of the cheapest market-linked investment options available.
NPS investors pay just ₹30 to ₹90 per ₹1 lakh annually. This is comparable to the fees charged by ETFs offered by mutual funds, but it is a fraction of the nearly 2% to 2.5% you pay for actively managed equity funds.
The low charges translate into higher returns for investors.
Tax Benefits of NPS
NPS offers multiple tax incentives in both the old and new tax regimes.
Under the Old Tax Regime
1) Contributions to NPS are eligible for deduction within the overall limit of ₹1.5 lakh under Section 80C.
2) An additional deduction of ₹50,000 is available for contributions under Section 80CCD(1B), which is over and above the threshold limit of Section 80C.
3) Section 80CCD(2) allows employees to claim an additional deduction for employer contributions to the NPS. The maximum deduction allowed is up to 10% of the salary (basic + DA).
These NPS contributions should be part of the individual’s emoluments and can only be made through the employer.
Under the New Tax Regime
Under the new tax regime, only the employer’s NPS contribution under Section 80CCD(2) qualifies for tax benefits. Whether you are a government or private sector employee, the limit for employer contributions is 14% of your basic salary plus dearness allowance.
Under this section, up to 14% of the basic salary contributed to NPS is tax-free in the new tax regime.
Also, while you can withdraw more at retirement now, the tax-free limit remains at 60% of the total corpus, so that extra 20% you withdraw will likely be taxed based on your current income slab.
Flexible Options to Get Market-Linked Returns
NPS offers two investment options: auto choice and active choice. With auto choice, asset allocation is managed for you, adjusting your investments between equity, corporate bonds, and government securities as you age.
There are four variants in the auto choice category: conservative, moderate, balanced, and aggressive life cycle funds.
In the active choice option, investors can allocate up to 75% of their funds to equity. They can maintain that allocation without the automatic reduction that occurs in auto choice.
For younger investors with a long investment horizon, auto choice may be a better option for achieving inflation-beating returns.
Conclusion
With its low cost, tax efficiency, flexibility, and guaranteed pension, NPS is a smart way to secure your financial future. It ensures that you don’t outlive your savings and provides a structured way to sustain a comfortable lifestyle in retirement. Try our NPS retirement calculator to plan yours.
