NPS investment: National Pension System (NPS) Diwas is observed on October 1. Launched on January 1, 2004, the National Pension System (NPS) has emerged as a game-changing scheme in India’s retirement planning sector. The primary objective is to motivate individuals to contribute regularly to their pension funds during their working years, thereby ensuring a secure financial future post-retirement.
Jointly administered by the government and the Pension Fund Regulatory and Development Authority (PFRDA), the scheme does not promise a predetermined pension amount but provides the potential for favourable investment gains. NPS assets have achieved an impressive 37% compounded annual growth rate (CAGR) to reach Rs 2.76 lakh crore, primarily due to the 58 lakh non-government subscribers contributing to this growth.
Top 5 recent changes in NPS ecosystem
1. Tax deduction limit
In the Union Budget 2024, Finance Minister Nirmala Sitharaman announced a significant alteration to the tax deduction limit for employer contributions. The adjustment raised the employer contribution benchmark from 10% to 14% of an employee’s salary. Consequently, employees can now attain an added deduction equivalent to 4% of their basic salary regarding employer contributions to the NPS. To illustrate, an employee earning a basic monthly salary of ₹1 lakh can now avail an additional deduction of ₹4,000 each month, ultimately leading to an annual deduction totaling ₹48,000.
2. NPS withdrawal
The rules for final withdrawals from the National Pension System (NPS) have been revised in 2024. Subscribers are now allowed to withdraw 60% of their total corpus as a tax-free lump sum. The remaining 40% must be utilized to purchase an annuity plan, which is not taxed upon withdrawal but will be taxed during the annuity payout phase. If the total corpus upon retirement exceeds Rs 5 lakh, 40% of the NPS corpus must be used to purchase an annuity plan, with no tax implications on this portion. However, the annuity payout will be subject to taxation based on the individual’s income tax bracket.
NPS offers an appealing incentive to its members. Individuals can withdraw 60% of the accumulated corpus as a lump sum, and this withdrawal is entirely tax-free. This favorable taxation treatment categorizes NPS under the ‘exempt, exempt, exempt’ (EEE) status, where investments, gains, and final withdrawals are all free from taxes.
Notably, in the financial year 2018-19, the government permitted a tax-free withdrawal of only 40% of the total corpus, subjecting the remaining 20% to taxation. However, in the subsequent Union Budget for FY20, the government raised the tax-free withdrawal limit from 40% to 60%.
3. NPS investment allocation
There has been a modification in the investment allocation guidelines within the NPS. The rule now stipulates that individuals can maintain a maximum equity exposure of 75% until they reach the age of 60. This adjustment allows subscribers to capitalize on investment growth opportunities during their years of employment.
NPS offers two investment choices: ‘Active’ and ‘Auto’. Under the ‘Active’ option, subscribers can select asset classes such as equity, debt, and alternative investment funds, with a maximum equity investment cap of 75%.
Previously, individuals opting for a 75% equity investment saw a gradual decrease of 2.5% annually after turning 50, eventually reaching 50% by that age to mitigate risks as retirement neared. However, this gradual reduction in equity exposure is now discretionary, allowing individuals to maintain a 75% equity allocation until the age of 60. The auto option remains unchanged.
4. Equity allocation in tier-2 NPS account
The government has also raised the equity allocation limit for tier-2 NPS account holders from 75% to 100%. This adjustment enables investors to increase their exposure to equities within their tier-2 NPS account, potentially providing enhanced growth prospects.
5. Direct Remittance (D-Remit) facility
The introduction of the Direct Remittance (D-Remit) facility now allows NPS subscribers to access the same-day NAV for their investments. By signing up for a virtual account number connected to their bank account, investors can take advantage of immediate NAV on their contributions through the D-Remit process. This feature offers significant benefits for NPS investors. Contributions made to the Trustee Bank (TB) before 9.30 am are swiftly invested on the same day, boosting investment returns. Additionally, subscribers can set up recurring auto-debit payments, whether monthly, quarterly, or half-yearly, to help grow their retirement savings seamlessly.
6. Systematic lumpsum withdrawals
From February 2024, NPS subscribers had the option to make partial withdrawals for various purposes, such as funding their children’s higher education, buying or building a residential property, and covering specific medical expenses. Subscribers can opt for a systematic lumpsum withdrawal (SLW) to periodically withdraw up to 60% of their NPS corpus between the ages of 60 and 75. The remaining amount must be used to purchase an annuity plan.
One of the advantages of SLW is that it enables subscribers to withdraw their lumpsum corpus gradually until they reach the age of 75, ensuring that their funds remain invested for a longer duration.
NPS at a glance
NPS is a defined contribution pension scheme that allows investors to accumulate a corpus during their working life for their retirement. The pension scheme has grown into a comprehensive, voluntary savings platform that appeals to participants from both the public and private sectors. Despite significant progress, there is still room for improvement in increasing awareness and expanding its reach among the population. As of September 2024, the NPS and Atal Pension Yojana (APY) — a government-supported pension scheme for informal workers — boast a total of 7.77 crore subscribers and combined assets amounting to Rs 13.31 lakh crore.
As of September 2024, the government sector assets of NPS touched rs 10.1 lakh crore. State government employees held Rs 6.53 lakh crore, while Central government employees held Rs 3.57 lakh crore.
Currently, there are 17,633 registered companies under NPS, with a total of 21.07 lakh subscribers. This number includes 8.4 lakh subscribers from public sector banks, regional rural banks, and central public sector enterprises.