A Guide to investing in the National Pension System (NPS)

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Here is a guide to investing in the National Pension System (NPS) with suggestions for existing and potential individual, corporate and government subscribers.

Over the past few years, the government has tried hard to make the National Pension System popular. First, it used the magic phrase tax-saving by allowing an additional 50,000 invested in Tier 1 to be discounted from taxable income.

Next, it used the magic phrase tax-free by allowing 40% of the corpus accumulated at retirement to be withdrawn free of tax. As we all know, it tried and failed to implement the same rule with the EPF. Sooner or later the EPF is bound to become marked to market and taxable like the NPS.

Many invested in the NPS with the hope that it will be given EEE status. The budget drama should be an indication that such a ruling is simply not financially viable by the govt.

Now the question is, ‘can I invest in the NPS now?’ I had answered this earlier, but I thought a more detailed response is necessary. I have always been a vehement critic of the NPS and this post will not be any different. However, I would like to suggest a way to make the most out of NPS for current subscribers.

Some basics:

NPS Calculator: How the National Pension Scheme works

NPS investments are mutual fund investments!

NPS will not provide a pension! You need to buy one yourself!

Before we talk about NPS, two aspects of investing need to be discussed.

1 Liquidity and National Pension System

Liquidity is the most  important concept in investing. Not compounding. Not time. If I cannot redeem at will from the corpus I have invested in, then who purpose of investing is lost, in my opinion.

People argue that a lock-in forces a corpus to grow and is necessary for a retirement product. I disagree. There are so many positive and negative events that can make a person stop working well before retirement and require the money from the retirement kitty.  At any point in time, the predominant corpus for any goal should have immediate liquidity at the fair market price.

I had discussed this point before:  How Liquid is Your Net Worth? and so did Dr. Uma Shashikant: Nuggets from the workshop on “strategic personal finance”

The National Pension Scheme has pathetic liquidity (see below).

2 Asset Allocation

Asset allocation is the second most important investing concept. Without understanding what asset allocation is, one should invest in anything, let alone the NPS!

Asset allocation refers to the amount of exposure to different asset classes in a portfolio  so that the portfolio has the potential to provide a return that would help achieve the financial goal it was intended for after taxes!

If I am investing in NPS, I must choose the asset allocation of the scheme such that the overall asset allocation of my retirement portfolio will get me the corpus that I have in mind. Preferably most of it liquid!

Here is how one can Decide on asset allocation for a financial goal. Asset allocation choices for existing NPS subscribers are discussed below.

Now let us consider each subscriber category.

Remember the actual tax benefits from NPS is only 40% of the amount saved! Tax on the remaining 60% is deferred until withdrawal!!

Existing and Potential Individual NPS subscribers

An individual subscriber is one who is either not employed or not offered any kind of pension plan by their employer.

Potential NPS Subscribers

I strongly believe that individual NPS subscribers, including NRIs who can now invest in the NPS should stay away from the NPS. The only exception being NPS Lite intended for “people who are economically disadvantaged and who are not financially well to do”.

There are multiple reasons for this. I will list only two for this category.

1) Do not join the NPS or invest any further in it* before reading this post: 

NPS: Partial Withdrawal Rules 2016

Those rigid rules alone should be motivation for individual subscribers to not choose NPS and for existing subscribers to go easy with their contributions (ignoring the tax breaks).

2) There are much better options in every possible way than the NPS

Do Not Invest Rs. 50,000 in NPS For Saving Tax!

Existing NPS Subscribers:

Existing individual subscribers may reevaluate the need for an NPS account (if in the remote possibility they are convinced by this post!), keep it alive with the minimum investment and focus on more liquid and efficient investment avenues for retirement.

If they would like to continue with the NPS account, then I would recommend avoiding equity (option E) and choose a mix of corporate (option C) and govt bonds (option G).

The corporate bonds would typically be PSU bonds. See the portfolio from SBI pension funds:  Scheme C

The average portfolio maturity and modified duration are quite high*. However, the bonds are from quite credit-worthy institutions (pl check before investing). So it should not be a problem.

* To understand these terms, see: How to Select Debt Mutual Funds Suitable For Your Financial Goals?

The government bonds are long-term gilt funds which can be quite volatile. So go easy on them. See the portfolio from SBI pension funds: Scheme G.

As an indication of their volatility, compare the average portfolio maturity and modified duration of class G with class C. I would recommend a 50-60% C with rest in portfolio (let us refer to this as C-G portfolio for reference later).

The equity allocation (see last section below) for retirement can be via direct stocks and or mutual funds. Why? because they are much better!

Existing and Potential Corporate NPS subscribers

The govt has lured corporate employers to offer NPS, either in lieu or together with EPF. The reason, when an employer contributes to the NPS, they get tax benefits.

So do the employee! This is in addition to 80C and has no upper limit. However, those who wish to quit their job and freelance much before  normal retirement (58/60) should either think real hard before choosing NPS or should have an alternative source of funding!

Both potential and existing corporate subscribers ought to think this through with care – the limitations of NPS and their own future plans.

Also, corporate NPS is not universally available, unlike EPF. So if you switch jobs then you would be left with both the EPF and NPS to nurse.

Yes, the tax benefits from the employer contribution  are quite alluring, but  do proceed with caution.

If you wish to use NPS, I would recommend the C-G portfolio with separate equity.

Existing and Potential Government NPS subscribers

Well, what can one say about this group! They have no choice in the matter! NPS is mandatory.

They have no choice in the asset allocation! They have 15% equity and rest in fixed income which is heavy on option G. So the NAV can swing quite a lot. For example, have a look at the three NPS mutual funds


The sharp fall in July 2013 corresponds to the bond market crash when the RBI tried to curb rupee depreciation.

It is only recently that govt employees can change their pension fund managers. I am told that they would soon be able to change their asset allocation too.

Once this is officially possible, I would again recommend the C-G portfolio with separate equity.

Overall asset allocation for all subscribers

Those who are far away from retirement can consider 50-70% equity from mutual funds or stocks and rest in the NPS C-G portfolio (they should be able to invest this much aside from the NPS contribution which may be mandatory).

NPS has an age-based variable asset allocation schedule where the equity allocation decreases with each passing year.

Source: link right below

The PFDRA has sought feedback on two more such active cyclesProviding option of more Life Cycle Funds to the NPS subscribers 

The active life cycle matters only if NPS is the only retirement product. This is the very last thing any NPS subscriber should do!  While an active cycle will reduce volatility, it will also reduce returns.

Update : NPS Tier 1 Equity Scheme (E) Performance – Oct 2016

Do let me know if I have missed out any aspect of investing in the National Pension System.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. I find your excel sheets are very useful. But i cant use it to its fullest. It would be very helpful if you could provide step by step explanation on how to fill excel in a detailed manner. Its just a kind request.

  2. Thanks Pattu for the detailed article. We had people from HDFC securities come to our organization to market NPS. Surprised that there was good response too. Was happy that I could convince few colleagues to stay away from NPS.

  3. Hi Pattu Sir,

    I have recently changed my job. Here, in new job, I came across NPS for the first time when I went through the CTC break up. I came to know that Employer will invest 8.33% basic into NPS every month provided Employee also contribute any amount between minimum Rs 50/- to maximum 10% of basic.

    Therefore, I have decided to invest the minimum amount of Rs. 50/-. I have also chosen Asset Class C as 100% allocation.

    Lets say monthly basic = X.
    Employee contribution = 50*12 = 600 {Tax exempt u/s 80CCD(1)}
    Employer contribution = X*8.33%*12 {Tax exempt u/s 80CCD(1B)}

    I hope, my approach and understanding are correct.

  4. I suppose if one really wants to save tax and avail of that 50k deduction, one can simply invest 50k per year and nothing more. That way you are not locking in a huge amount of money till 60 and you also have a small corpus which will no doubt come in handy during the golden years.

  5. For a disciplined investors following this site, its ok to take above views. But think of those non disciplined investors , for them NPS is much better option than other superannuation schemes available in market. I think here u r compairing apple with oranges. Try to compare nps wit any other superannuation schemes in the market.

  6. Can a company opt for both EPF and corporate NPS , if yes , can employee avail tax benefit of employer EPF contribution and under 80CCD2 ?

  7. hi, I would like to know, if i contribute Rs.500 why the transaction fees 14% in online transaction via through SBI. then what is the benefit for me

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