The National Pension System: How Investing in this Scheme Pays off in the Long Run27 February 2020

Leading a secure, comfortable and dignified life after retirement is every citizen’s basic right. And being financially independent is one of the most important factors that helps senior citizens rest assured without worrying about the present and future. For this reason, government schemes such as the National Pension System provide individuals the opportunity to invest their money early on and reap the benefits of a peaceful post-retirement life.
Over the past decade, the National Pension System has enjoyed immense popularity as a reliable means of long-term investment and retirement-oriented financial planning. So, here’s a look at what the NPS entails and how investing in this scheme is sure to help investors in the long run:

What is the National Pension System all About?

Started by the Government of India in 2004, the National Pension System is a long-term mutual funds investment scheme with a specific focus on returns after retirement. Initially launched only for government employees, the scheme has now includes in its purview all the citizens of India. Under this scheme, the investor invests specific sums of money, either in the form of a lump-sum investment or by means of a Systematic Investment Plan (wherein s/he would invest specific amounts of money at regular intervals). Ideally, the lock-in period in NPS is till the individual’s age of retirement. Withdrawal of invested money before this stage typically entails penalty for the investor. However, there is some amount of flexibility in NPS investments with regard to whether or not one opts for investment in both the NPS ‘tiers’.
The NPS consists of 2 tiers: tier-I and tier-II.

i)              Tier-I is the basic and mandatory NPS avenue from which an individual must not withdraw money till his/her retirement. In tier-I, one is required to invest a minimum of Rs. 500 on a yearly basis.

ii)             Tier-II is the supplementary NPS account in which one may invest if s/he has other investment objectives besides post-retirement returns. Unlike tier-I, there are no restrictions on withdrawal from this account. Here, one is required to invest a minimum of Rs. 1,000 on a yearly basis.


 The Long-term Perks of Investing in NPS in India

The following are some benefits of investing in NPS in India:

  1. Exclusive Tax Benefits: One of the major advantages of the NPS is that it offers exclusive tax exemptions that many other schemes may not provide. Under the NPS, an investor may enjoy tax exemptions for investment amounts up to 1.5 lakh, as well as an additional tax benefit on Rs. 50,000 as per Section 80CCD. This helps an investor save up a significant amount of money each year, thus increasing his/her purchasing power.

  2. Secure Means of Long-Term Investment:  Over the past decade, the NPS has established itself as an extremely reliable means of retirement-oriented long-term investment. By investing one’s corpus in multiple securities and organized proportions, it entails very low risks and is resilient to inflation and economic crises. The fact that it is a government-sponsored scheme adds to the security offered by it.

  3. Flexibility in Terms of Varying Investment Amounts: Another major advantage of NPS is that it is not mandatory for one to invest the same amount of money each year. By means of a flexible SIP, one may (after the completion of some basic procedures) vary the NPS investment amount vis-à-vis his/her changing requirements and purchasing power.

  4. No Upper-Limit on the Amount to be Invested: While investing in NPS tiers I and II require an individual to invest minimum amounts of Rs. 500 and Rs. 1,000 respectively, there is no upper-limit on the amount to be invested. Thus, contrary to popular belief that NPS only caters to the middle-income group, it is actually well-suited to all individuals from 18-70 years of age, regardless of their earnings.


While NPS as a long-term strategy may come across as quite stringent in terms of its penalties upon premature withdrawal, it is actually a boon for individuals looking for a steady source of post-retirement income.  However, NPS may not be a suitable investment strategy if you are looking to fulfill your short-term or mid-term investment goals. Rather, it better caters to long-term and particularly retirement-based objectives, and is, indeed, one of the most secure retirement-oriented strategies in India today.
Looking for some guidance while planning your finances for retirement? Click here to avail of Arcadia’s investment and finance services today!

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