Evaluating NPS(National Pension System)

In this post, I will share my experience with NPS(National Pension System).

Pre-read: If you are new to NPS, it would be beneficial to read a few articles. Below are some links with useful information:

• Official website https://www.npscra.nsdl.co.in/index.php, FAQs   
• FAQs on economics times FAQs
• Tax benefits https://www.npscra.nsdl.co.in/tax-benefits-under-nps.php
• Withdrawal rules https://www.npscra.nsdl.co.in/all-faq-withdrawal.php

Disclaimer: Above links are for reference only and we don’t verify the accuracy of information.

I subscribed to NPS in Q3 2016 through my employer. The primary reason was to save income tax.

Benefits:

• 10% of my basic salary is deposited by my employer in NPS. This is fully exempted under 80CCD (2) of the Income Tax Act. There is no upper limit for this contribution.
• I deposit an additional Rs. 50,000 in NPS every financial year which is exempted from tax under subsection 80CCD (1B). This is over the Rs 1.5 L limit under 80C.
• Flexibility to choose pension fund managers and asset allocation in different schemes.
• Returns on investment are comparable to mutual funds.

Below is a snapshot of my investment and returns as on 14th Sep 2019:

Without NPS, I would have paid a tax of almost Rs. 1,43,875 on the net contribution of Rs 4,61,139. Apart from tax savings, the investments have additional returns of ~8% 

Is it worth to invest in NPS if we plan to retire early?

• For me, it’s a big YES. The tax savings is great for higher tax-slabs.
• As it’s deducted from salary every month, its similar to SIP. Also, the return on investment is comparable to Mutual funds.
• A minimum contribution of Rs 1,000 is required to keep the account functional.
• One can also opt for a premature exit after completion of 10 years, with some conditions.
• Similar to EPF and PPF, its an EEE(Exempt-Exempt-Exempt) scheme.

Is it worth to invest in Tier-2 account?

Investment in the tier-2 account of NPS doesn’t provide any tax-benefit and the returns are comparable to mutual funds. Hence, I prefer to invest in MFs.

 The risk associated with equity market volatility

NPS allows investment in different schemes – equity markets(E), government securities(G) and other fixed-income instruments(C) via various pension fund managers(LIC, SBI, HDFC etc).
A subscriber can choose a particular fund manager and % of fund allocation in each asset type. A high allocation in equity is associated with market risks, similar to buying stocks or mutual funds. I’ve personally seen my NPS returns fluctuate between 2-20% so far.

What is your experience with NPS investment? Please share in the comments section.