Six things to know before investing in NPS

If you want to invest for retirement goals, you cannot overlook the National Pension Scheme (NPS). The number of investors in this scheme is also rapidly increasing. Currently, more than 1.81 crore people are enrolled in this scheme. According to the Pension Fund Regulatory and Development Authority (PFRDA), the Assets Under Management (AUM) under NPS have increased to over ₹12.56 lakh crores by May 25, 2024, witnessing a growth rate of 28% compared to the previous year. In August 2023, the AUM of NPS had touched ₹10 lakh crores.

If you are considering investing in this scheme, here are six things you should know:

1) What is NPS?

The National Pension System (NPS) is a government retirement scheme introduced on January 1, 2004, initially for government employees. However, later it was opened for the private sector as well. Any individual, whether a government or private employee, professional, or self-employed, aged above 18 years can be a part of NPS. The minimum initial investment in NPS Tier 1 account is ₹500.

2) How to open an NPS account?

You can open an NPS account both online and offline. For online account opening, visit the NPS website (https://enps.nsdl.com/eNPS/). To open an offline account, you need to visit the Point of Presence (PoP) for NPS. The list of PoPs is available on the NPS website. You can also open NPS accounts in select banks and post offices.

3) How does NPS work?

NPS offers two types of accounts: Tier 1 and Tier 2. Tier 1 is the primary account meant for pension and tax benefits, while Tier 2 is an add-on facility. Tier 2 operates like a savings account, allowing you to deposit and withdraw funds at any time.

4) How does NPS scheme invest?

Your money in NPS is invested in different asset classes like equity, government bonds, corporate bonds, and alternative assets. Currently, investors in NPS can choose between two investment options: Auto and Active Choice. In Active Choice, subscribers can allocate percentages to different asset classes themselves, while in Auto Choice, allocation is based on the subscriber’s age.

5) What returns does NPS offer?

There is no guaranteed return in NPS, similar to traditional schemes like PPF. However, compared to other small savings schemes, NPS has provided better returns. As per PFRDA data until May 24, the returns in equity were 35.06%, corporate bonds 7.12%, government securities 7.83%, and central government schemes 10.78% in the past year. Since inception, NPS has returned 13.78% in equity schemes, 9.08% in corporate bonds, 8.76% in government securities and 9.55% in state government schemes.

6) How do you get money at retirement?

In NPS, you can withdraw up to 60% of the total deposited amount at maturity, which is tax-free. The remaining 40% must be used to purchase an annuity plan, ensuring you receive a regular pension.

Investment advisor Jitendra Solanki says that NPS is a good retirement planning option. The corporate sector is increasingly showing interest in this scheme for the welfare of its employees. Additionally, due to additional tax benefits, the scope of NPS is rapidly expanding. If you have 20 to 25 years left until retirement and do not have a pension plan, you can consider investing in NPS.