NPS is a pension scheme in India. (Wikipedia says it is very close to 401(k) of USA). The basic outline of the scheme is as follows -

  • NPS invests money in (E)quities (Max 50%), (C)orporate Bonds and (G)overnment Bonds.
  • NPS provides an auto choice option, wherein based on the age of investor it shifts the investment percentage, till 35 years it invests 50% in E, 30% in C and 20% in G. As you age E tapers off till it hits 10% in E 10% in C and 80% in G
  • NPS also provides manual choice.
  • Has a lock in period for withdrawl. Can't withdraw money until age of 60. There are some scenarios where you can withdraw the money but let's assume all is well and it can only be withdrawn at the ripe age of 60
  • Withdrawl - Minimum 40% has to be used to purchase an annuity. This is not taxed, only income received from the annuity is taxed. 40% of accumulated NPS is tax-free (Update Feb'2020: With recent changes, 60% of accumulated NPS is now tax-free)
  • Tax benefits - Upto 50000 INR is tax-free when invested here.

Why I want to invest -

  • I fall into the highest tax bracket 30%, so if I invest 50000 INR then I can save 15000 INR.
  • An oppurtunity to save some money with no default option to withdraw.
  • Provides a pension, I currently work in an industry which has no pensions.
  • Hopefully it will provide some lump-sum money that I could probably use to buy a house / kid's education / kid's marriage.

Questions -

  • As this is offered by government, rules might change in the future. It might either be for the good or the bad but given the current data is it a worthwhile investment?
  • If yes, would be better to fix choice at 50% in E and 25% in C and G or go for the auto choice?
  • I see many arguments in the internet saying that it is bad investment because if you put the same money into equity oriented mutual funds then you will get better returns. Since this is a pension based scheme wouldn't it be prudent to have some diversification into bonds and government securities? Am I wrong in thinking this way? If I am wrong, why is it?

1 Answer 1


The way the question is worded, it is slightly opinion based.

Just to point out;

Tax benefits - Upto 50000 INR is tax free when invested here.

This is actually 200,000 INR under 80C. So if you invest max of 150,000 in other instruments in 80C; you can still invest 50,000 into NPS.

Hopefully it will provide some lumpsum money that I could probably use to buy a house / kid's education / kid's marriage.

There are very few withdrawal options. Generally in the current scenario; By the time you retire; you would already have house, kid would have got married.


given the current data is it a worthwhile investment?

It is a good investment option available. It is up to individual to select this or invest else where.

If yes, would be better to fix choice at 50% in E and 25% in C and E or go for the auto choice?

As you are young it is better to have max 50% in Equity and actively monitor this and change the percentage as you near the retirement age. If you don't have time, or are not financial savy, or one is plain simple lazy; going with Auto choice makes sense.

bad investment because if you put the same money into equity oriented mutual funds then you will get better returns ...

This depends. If you are currently investing everything into Equity; then yes at absolute level, the returns are high. However if you are investing into Equity and debt to achieve a balance, then NPS is doing it automatically for you. As the NPS has very low costs, there is substantial advantage. In some years [2013-2014?] the NPS equity return has been excellent and exceeded leading mutual funds.

Other Aspect

  • Annuity market in India is not yet mature. Whether this will mature in 20 years time is speculation. Hopefully it will be more mature. What this means is the 60% money that is kept as Annuity; will give returns of around 4% 6.5% [Today's market rates for annuity products]. While the current Bank Fixed Deposit Rates are in the range of 6-8%.
  • If NPS is offered by Employer that it does make slightly better compared to EPF.

The Annuities need to invest in guaranteed risk free instruments; generally bonds. As the rates are locked for life, they need to factor things like average life expectancy, demographics, etc. This is largely statistical. Similar to how the Insurance premiums are decided. This is adjusted periodically. Say they offer 6.5% for 100 people. The investments into bonds is yielding only 6%. Then for next 100 people, they would offer 5.5%. However if the mortality increases, i.e. 50 people die at age of 70, they just need to adjust it to 5.75% for next 100 ... so there are quite a few parameters that go in and statical models output what the rate should be offered. At times the corpus manager may take a hedge to minimize downside. This is a specialized subject and there no dummies that show how rates are determined. It is also a trade secret.

  • Why do you say the annuity market is not yet mature in India?
    – bluefalcon
    Jan 4, 2017 at 9:20
  • @bluefalcon It is only in 2005 [around] we started into Annuity kind of retirement product. The last I knew only LIC offered Annuity. So this is all very new; all these run on historical data with various demographics that the industry has not yet built. Hopefully by the time you retire, say 30 years it may well be a very different story.
    – Dheer
    Jan 4, 2017 at 13:40
  • looks there are lot of other companies that offer annuities now - npscra.nsdl.co.in/annuity-service-providers.php
    – bluefalcon
    Jan 5, 2017 at 4:34
  • @bluefalcon Thanks for the link. Looks like 5 companies which is good. The rates also seem to have improved to around 6.5% which is not bad.
    – Dheer
    Jan 5, 2017 at 5:28
  • 2
    @bluefalcon Getting Rs 100 every month is not same as getting Rs 1200 after a year. Because the Rs 100 in first month invested gives you some money for 11 months, and Rs 100 in second month for 10 months. Thus sum total of monthly payout will be less than yearly payout.
    – Dheer
    Jan 5, 2017 at 6:23

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