Three changes that can make the NPS an attractive retirement solution

Published: November 7, 2021 at 10:08 am

We discuss three changes that can make the NPS an attractive retirement solution. Let us face a simple fact: The only reason many investors use the NPS is because of the “extra Rs. 50,000” tax saving or reduction in taxable income to be exact.

The biggest drawback of the NPS is its rigid exit rule. Anyone exiting the scheme before attaining the age of 60 will have to buy a pension plan for 80% of the corpus.  Very few corporate employees would continue working until they turn 60. Also, see: How to prepare for the “new normal” in retirement planning

Desired change no 1: The NPS exit clause should be modified to remove the 60 years limit. Exit at any age should be allowed with the same 40% annuity clause (ideally the annuity clause should also be removed but that is unlikely to happen).

Many corporate employers are offering NPS as a choice and some even allow employees to split their contributions between EPF and NPS. However, an option to change the employer contribution from EPF to NPS is rarely offered. Also, when an employee shifts from an NPS friendly employer to an EPF-centric employer it clutters up the portfolio.

Desired change no 2: NPS should be offered as a choice by all employers. This way existing NPS accounts can be used for retirement contributions even if the employer only offers EPF.  The NPS employer contribution is tax-free (to both parties) and has a much higher deductible limit than the employee contribution. To understand the limit rule see: Do Not Invest Rs. 50,000 in NPS for additional tax saving benefits!


The exit clause of the NPS implies we sever all links with the NPS on exit. There are no options to defer either the annuity or lump sum payout up to the age of 70 but these come with restrictions. For full details see: How to withdraw from NPS by optimising tax and market fluctuations after 60.

Desired change no 3: NPS should allow subscribers to continue investing the remaining corpus (that is after annuity purchase) for life. A new mutual fund can be created to segregate AUM in the accumulation phase and withdrawal phase. Then the NPS can effectively be used as a part of a retirement bucket strategy to generate inflation-protected income after retirement. Here is an example: Retirement plan review: Am I on track to retire by 50?

The pension fund regulatory authority has modified the original form of the NPS several times learning from experience. Let us hope they look beyond a “pension oriented” mindset and make the NPS a flexible retirement solution for young earners.  Until the first two changes mentioned above are modified, our recommendation will continue to be: “avoid NPS unless you have a stable job with an employer contributing to it”.

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2600 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 600 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps