Retirement planning in India often doesn’t get the attention it truly deserves. While we plan extensively for short-term goals like travel, buying a car, or even purchasing a house, the idea of saving for retirement takes a backseat. This is partly because retirement feels distant and intangible, and human nature tends to prioritise immediate needs over long-term security. However, ignoring retirement planning can lead to financial stress in later years, especially when income sources begin to dwindle. That’s where the National Pension System (NPS) comes in—offering a secure, stable, and smart solution for retirement savings.
Why retirement planning needs attention
Retirement is a long-term goal that demands early and consistent planning. The earlier one starts, the more time investments have to grow. Unfortunately, many investors in India either delay or overlook this crucial part of financial planning. Since retirement is not an immediate concern, it often does not get the structured approach it requires. Time, which is a key factor in compounding wealth, is often wasted due to procrastination.
Choosing the right investment product for such a long-term goal becomes essential. Among the options available, NPS stands out because it has been specially designed to serve retirement needs.
NPS: A retirement-focused investment product
Unlike many other investment avenues that serve multiple goals, NPS is built with retirement in mind. It combines tax benefits, low cost, flexibility, and structured investment planning—making it one of the most comprehensive retirement products available for Indian investors.
Let’s look at the three major reasons that make NPS a smart choice: tax efficiency, cost-effectiveness, and flexibility.
Tax benefits that work in your favour
One of the strongest incentives for investing in NPS is its tax advantage. If you follow the old tax regime, you can claim an additional deduction of ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit available under Section 80C. This exclusive benefit makes NPS an attractive option for tax-saving purposes.
Additionally, unlike other investments where switching between funds may incur capital gains tax, NPS allows you to move between equity and debt options without attracting any such tax. This makes it ideal for dynamic portfolio rebalancing.
At maturity, 60 percent of the NPS corpus can be withdrawn as a lump sum, and it is entirely tax-free. The remaining 40 percent is used to purchase an annuity, which provides regular pension-like income.
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Ultra-low cost makes a big difference
NPS is also one of the lowest-cost retirement products in the market. The annual fund management charges are capped at around 0.2 percent to 0.25 percent, which is a fraction of what most mutual funds charge. Over a long-term horizon—say, 20 to 30 years—this cost efficiency can significantly boost your overall returns.
For long-term retirement planning, keeping costs low is just as important as choosing the right asset mix. NPS helps investors achieve this balance effortlessly.
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Flexibility with a long-term commitment
NPS offers flexibility in more ways than one. You can begin investing as early as 18 years of age, which helps in initiating a disciplined savings habit early in life. Even if you’re not consciously planning for retirement at that age, starting an NPS account begins the compounding process that pays off in the long run.
Another advantage is the flexibility in choosing your asset allocation. If you are a knowledgeable investor, you can opt for the Active Choice and decide how much of your money goes into equity, corporate bonds, and government securities (within regulated limits). Alternatively, if you’re unsure about how to allocate your assets, the Auto Choice option lets the system handle it based on your age and risk profile—conservative, moderate, or aggressive.
As you grow older, your equity exposure is automatically reduced, safeguarding your retirement corpus from market volatility. The system also rebalances your portfolio over time, helping you invest more when markets are low and lock in gains when markets are high.
Smart design to manage market risk
One of the unique aspects of NPS is how it handles market ups and downs. Through auto-choice and rebalancing mechanisms, NPS offers an in-built risk management system. By steadily reducing equity exposure as retirement nears, it ensures your savings are protected during turbulent times. At the same time, it takes advantage of market corrections by increasing allocations during downtrends—this smart, automated approach often yields better risk-adjusted returns over time.
Moreover, since NPS is a long-term product with strict withdrawal norms, it prevents premature use of retirement savings, ensuring that your investment benefits from the full power of compounding.
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Use NPS as a core, not the only, retirement tool
While NPS offers a compelling case for inclusion in your retirement plan, it should not be the only instrument you rely on. Given the long lock-in period and limited liquidity, it’s important to maintain balance with other investments that can support milestone goals like children’s education, home purchases, or medical emergencies.
A diversified portfolio that includes NPS for retirement, along with mutual funds, fixed deposits, or real estate for other goals, can help you build a more holistic financial plan.
Consulting with a financial advisor is highly recommended to assess your overall goals, income patterns, and liquidity needs before allocating funds to NPS.
NPS brings together the three essentials of retirement planning—security, stability, and smart structuring. With tax efficiency, low costs, and disciplined investment design, it offers a powerful solution for anyone looking to plan for a financially secure retirement. By including NPS in your financial strategy today, you give your future self the gift of peace and independence tomorrow.
The author is Managing Partner at Scripbox.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with financial advisor before taking any decisions.
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