National Pension Scheme: Awareness about retirement planning is gradually increasing in India, but statistics show that a large population is still outside this scheme. The National Pension System (NPS) is one of the country’s leading retirement schemes. Currently, it has approximately 21 million subscribers, and its Assets Under Management (AUM) have crossed ₹16 lakh crore. However, considering India’s vast population, this figure represents less than 2 percent. To bridge this gap and make it more beneficial for common investors, the Pension Fund Regulatory and Development Authority (PFRDA) has recently made some major changes. These changes directly impact investors’ finances and future.
Affordable Investment and Excellent Returns
Investors often ask why they should choose NPS. The biggest reason is its low cost. NPS is considered the most affordable retirement plan in the country. Its annual expense ratio for the Tier-1 equity option is only around 10 basis points, which is much lower than any other financial instrument. Investors can start investing with as little as ₹1,000 annually.
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In terms of returns, NPS has also performed brilliantly. The 10 asset managers in Tier-1 equity have given annual returns of 12.5 percent to 16.5 percent over the last three years. From a long-term perspective, i.e., 10 years, these returns have been between 12.5 and 14.5 percent, which is considered quite beneficial for wealth creation.
Liquidity Conditions Made Easier
Despite these advantages, the growth of NPS has been relatively slow. The main reason for this was the stringent liquidity conditions. Investors often compared it to mutual funds, where withdrawing money is easier and Systematic Withdrawal Plans (SWPs) are available. The biggest hurdle in NPS was that 40 percent of the total accumulated amount had to be compulsorily invested in an annuity (pension plan) upon maturity. While 60 percent could be withdrawn as a lump sum tax-free, the regular pension received from the annuity was taxable. This made investors hesitant to lock in their capital.
Now, withdrawing money is easier
Recently, the PFRDA (Pension Fund Regulatory and Development Authority) has made NPS even more beneficial by changing the rules. Now, investors don’t need to wait until the age of 60 to withdraw their money. According to the new rules, subscribers can exit the scheme even after 15 years of investment. This relief is even greater for small investors. If the total accumulated amount in the NPS fund is up to Rs. 8 lakh, you can withdraw the entire amount without buying an annuity. Earlier, this limit was only Rs. 2 lakh.
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In addition, if your corpus is more than Rs. 12 lakh, you can now withdraw 80 percent as a lump sum, and only 20 percent of the amount needs to be invested in an annuity. Earlier, only 60 percent was allowed to be withdrawn. This change can prove to be a game-changer for those who want to have a large sum of money in hand after retirement.
The investment age limit has increased
The PFRDA has increased the maximum age limit for remaining invested in NPS from 75 years to 85 years. This means you get an additional 10 years for your money to compound. The basic principle of retirement planning is that the longer your money remains invested, the more returns you will get. A minimum investment of 15 years is mandatory in NPS, which ensures that your money withstands market fluctuations over the long term and builds a substantial fund.
