Ultimate Guide that Will Help in Understanding the NPS Scheme!


Retirement is meant for peace. You had put in your hard yards when you were working, and now is the time to sit back and relax. One thing that can ensure that your retirement life is peaceful is good financial health. In addition, the only thing that can assure you healthy financials at retirement is saving while you were young. That is where the national pension system or NPS comes into play. Let us learn more about NPS and explore its benefits.

What is NPS?

The national pension system is a retirement plan launched by the government of India to help its citizens with retirement planning. You can invest a small amount of money every month in the national pension scheme to build a corpus for your retirement. Since it is a retirement fund, it has a lock-in period until you turn 60. At maturity, you can withdraw up to 60% of the total corpus you have built, and the rest will be paid back to you as a monthly pension. NPS comes under section 80c of the income tax act, and the contributions made towards it are tax-deductible up to Rs.1.5 lakh. Additionally, the corpus at the time of maturity is tax-free.

Asset allocation for NPS

The money you put in the national pension scheme is invested in different securities to ensure you returns. This includes stocks, debt instruments, bonds etc. There are various asset allocation choices with NPS, and you can choose one according to your risk appetite and investment goals. For instance, if you are a risk-averse person, you might want to make sure your money goes to a fund with less risk and funds with more debt components might work for you better. At the same time, if you are an aggressive investor, a fund with more stocks components might suit you better. For this selection, NPS gives you two choices –

  • Active choice – In this option, you get to have the maximum level of customisation on your portfolio. You can choose where to choose the level of asset allocation for each security type, but there are some limitations. To begin with, asset allocation towards alternate funds is capped at 5%.

In addition to that, up to the age of 50, the maximum equity proportion allowed in your portfolio is 75%. From the point you turn 50, the maximum equity ratio allowed will drop by 2.5% every year to reach 50% at the age of 60. This is to safeguard your money in the later years of your employment, where your risk appetite might be lesser.

The ideal allocation percentage here will depend on your investment choices. You could consult an investment expert to understand this better.

  • Auto choice – This option chooses a fund automatically for you. The allocation here might be different for different investors, according to their profiles. The automation will aim at growing the capital during the early years of investment and growing it nearing maturity.

NPS is an efficient option to build a retirement corpus with a small amount of money every month. Join early to enjoy more growth.

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