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

Here are some less-understood facts about the National Pension Scheme (NPS).

  • National Pension Scheme comes with no guarantees of returns.
  • NPS is mutual fund and carries with it all the risks associated with any old mutual fund. Read more: NPS investments are mutual fund investments!
  • The aim of NPS is to generate a corpus and not provide a pension.
    • When it is time to withdraw (after age 60), the subscriber should take the corpus generated (40% minimum) and buy an annuity (pension) from any of the designated annuity providers like LIC, SBI, ICICI, HDFC and Star Union. Details here: Annuity Service Providers
    • The annuity provider will offer a pension at the annuity rates applicable at the time of purchase. There is no special annuity rate for the NPS, or at least there need not be (and is not at the time of writing)!
    •  Anyone with a big enough sum can purchase these annuities from the insurers. An NPS account is not necessary! This is point the title conveys. It is not NPS that provides the Pension. The annuity provider does - which they would for any individual whether they are NPS subscribers or not. NPS is only a means to obtain a retirement nest egg. There are other ways to obtain a much more healthier corpus with lot more efficiency.
  • NPS is an EET scheme. Meaning the amount you invest is exempt from tax (up to 1.5L under section 80C and 0.5L under 80CC1(B)). The gains made from this investment is exempt from tax as long as you invested. However, 60% of the entire sum - amount invested + gains will be taxed as per slab when you withdraw. These are the current tax rules.

FAQ about the NPS

  • Can I open an account to invest only 50,000 under 80CC1(B) and invest elsewhere for 80C deductions? Yes, as long as you open, the govt. will be happy!
  • Where can I find information about the returns generated by various pension fund managers?  Here: Return of NPS Schemes 


With inputs from Facebook group, Asan Ideas for Wealth.

Update 2:  NPS: Partial Withdrawal Rules 2016 are just awful! Beware.

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7 thoughts on “NPS will not provide a pension! You need to buy one yourself!

  1. Rajesh

    Prof. Pattu,
    My friend is a TN state government employee contributing towards (Contributory Pension Scheme) CPS. Is CPS is same as NPS? how to know equity/debt percentage of CPS portfolio and any ways to change it as per his wishes?

    1. freefincal

      If s/he joined after 2004 it is probably NPS. Else same as EPF. Gvot employees cannot change equity or debt allocation. Equity allocation is fixed at 15% as of now.

    2. Aee

      No...TN implemented scheme before 2004 from 1-04-2003 for its employees ...rules are similiar to NPS..but not yet implemented NPS architecture under PFRDA


    LTCG for equity/equity fund is nil. At the time of withdrawal, NPS is treated as debt fund and taxed accordingly. Am I right?


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