National Pension System: Why NPS should be a key investment plan for early retirement

The desire for early retirement is gaining popularity as more individuals aim to escape the traditional work timeline and achieve financial independence before the usual retirement age of 60. The National Pension System (NPS) is an excellent option for those seeking early retirement, offering a balanced combination of wealth creation, tax benefits, and a dependable income stream. Participants can maximize their returns from the NPS after reaching 60.

What is NPS?

NPS is an effective retirement planning tool in India. It helps individuals accumulate wealth for their post-retirement years.

NPS Diwas on October 1

The Pension Fund Regulatory and Development Authority (PFRDA) will observe 1st October as the National Pension System Diwas (NPS Diwas) to promote pension and retirement planning among the citizens of India and enjoy financial independence post-retirement.

PFRDA Chairperson Supratim Bandyopadhyay said, “We are happy to continue our celebration of October 1st as “NPS Diwas – A Day for Pension Planning”. Through this campaign, we reiterate our commitment towards creating awareness about pension planning among the public. As a regulatory body, our foremost aim is to cover all eligible citizens under a pension scheme to fulfil the vision of a pensioned society for India.”

Livemint spoke to Kurian Jose, CEO, of Tata Pension Management, on how investing in NPS can help you retire early

Wealth Accumulation

Diversification: The NPS enables investing in various asset classes, including equity, government, and corporate bonds. This diversification helps reduce risk while potentially delivering higher long-term returns.

Power of Compounding: Starting early allows compounding to work in your favour, leading to significant corpus growth by retirement. “NPS permits you to allocate up to 75% of your investments in equities (under active choice), allowing you to capitalize on higher returns during the accumulation phase, accelerating wealth building for early retirement. Even with the auto choice option, a balanced asset allocation across equity, corporate bonds, and government securities—tailored to your risk appetite, whether aggressive, moderate, or conservative—can yield better returns than traditional investment methods,” explained Kurian Jose, CEO of Tata Pension Management.

Tax advantages under the NPS

NPS offers tax deductions under both old tax as well as the new tax regimes.

a) 80CCD(1) – Individuals can invest up to ₹1.5 lakh and claim a deduction; however, this deduction counts toward the overall ₹1.5 lakh limit under Section 80C.

b) 80CCD(1B) – This section allows an additional deduction of up to ₹50,000, over and above the ₹1.5 lakh limit of Section 80C. This benefit is available only under the old tax regime.

c) 80CCD(2) – Salaried employees whose employers are enrolled in the NPS can claim this deduction, which is capped at 10% of their basic salary under the old tax regime. This deduction is applicable in both the new and old tax regimes.

Employees opting for the New Tax Regime can now take advantage of a higher deduction of up to 14% of their basic salary for employer contributions to the NPS, as specified in Section 80CCD(2) of the Income Tax Act. Finance Minister Nirmala Sitharaman made this announcement during the presentation of Budget 2024.

Kurian Jose highlights that this tax efficiency enables you to maximise your savings and increase the investment in your retirement corpus. Over time, these ongoing tax savings can accumulate significantly, accelerating the growth of your retirement fund.

Additionally, you can switch between asset classes—equity, corporate bonds, and government securities—up to four times a year without incurring any tax liability. This feature is unique to only a few investment options. Jose adds that the ability to switch between asset classes without tax implications also contributes to building a more robust retirement corpus.

Regular income post-retirement

One of the key benefits of the NPS for those aiming for early retirement is the ability to secure a regular income stream post-retirement. Upon maturity, you can withdraw up to 60% of the accumulated corpus as a tax-free lump sum or opt for systematic lump-sum withdrawals. In comparison, the remaining 40% must be invested in an annuity.

Kurian Jose explains, “You can also use the entire 100% of your corpus to purchase an annuity, which provides a consistent monthly income during retirement. This can help maintain your lifestyle after you stop working. A variety of annuity options are available to suit your financial needs.”

NPS features two types of accounts: Tier I and Tier II. Tax deductions apply solely to the Tier I account, while Tier II accounts do not offer any tax benefits.

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Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.