NPS Scheme: How to Make Most Out of Your Investment in National Pension Scheme

National Pension Scheme (NPS) is a kind of small savings scheme started by the Indian government to promote the need to create a retirement corpus. Launched in the year 2004, NPS scheme was earlier just meant for the government employees. However, from 2009 onwards, the pension scheme became open for all eligible citizens to voluntarily invest in it. Any Indian falling between the age of 18 and 70 years can invest in NPS.

Note that the NPS scheme in recent years has evolved considerably to become a more tax efficient, wealth generating and flexible option. NPS now allows the deployment of a maximum of 75% of fund corpus in equities through active mode. This gives the instrument the potential to generate bigger corpus over the long run.

Here are 4 major ways to maximize your investment in National Pension System:

  • Avail maximum tax benefits

While long-term capital gains on equity funds now incur 10 percent tax on crossing the threshold of Rs 1 lakh, NPS taxability is heading in the reverse direction. Previously, just 40 percent of 60 percent accumulated fund corpus was permitted to be withdrawn in lump sum form during retirement wherein this 40 percent was tax free. However, the remaining 20 percent was taxed. Now, the whole 60 percent is tax free. The 40 percent balance still requires to be mandatorily put in annuity, which is taxable.

Employer’s contribution towards your NPS account is completely tax free up to 10 percent of your basic salary. Even if your employer does not provide an NPS facility, you can still open this account and claim tax deduction of up to Rs 1.50 lakh as per Section 80 CCD (1). Additionally, you can also claim a tax deduction of Rs 50,000 as per Section 80 CCD (1B), which is over and above the Rs 1.50 lakh available deduction.

  • Look beyond tax savings

Do not just invest in an NPS scheme to avail tax benefits. For instance, investing Rs 50,000 every year in NPS to avail additional tax benefit might not help you to create an adequate retirement corpus. Putting a limit forms an artificial ceiling towards your investments. Apart from this, it also deprives you of pension benefits. Thus, to make most of the NPS benefits, ensure to include NPS into your investment portfolio with the aim to not just save tax but also meet your long-term financial goal of retirement corpus creation.

  • Choose active mode

When investing in NPS, you are provided with 2 options – active and auto. If you choose the active option, then you will have to decide the percentage allocation and asset allocation pattern of every asset class on your own. However, in the auto option, your investible fund is automatically invested by the fund managers in the selected life cycle fund.

As active NPS mode provides you with the benefit to decide the fund ratio and asset allocation pattern, investing through them permits you to avail greater equity exposure. With retirement being a long-term goal, equity is an apt asset class for forming adequate retirement corpus. It is because equity as an asset class has the potential to outperform inflation and fixed income instruments over the long term by a wide margin.

  • Flexibility to switch

As the active option demands you to have a good understanding about debt, equity, and alternative investment instruments, it is critical to carefully select the fund and periodically review the performance. In case the chosen fund underperforms, NPS allows you to switch to auto plan or change the fund asset allocation under active option once in a year. Remember, both these switches are not allowed in one financial year. In the case of investment through an auto option, you can switch to an active plan.


Retirement planning is tricky. Firstly, you will find inflation guzzling up your savings. They are followed by agents and bankers who upsell their unsuitable insurance and investment plans. In addition to this, the tendency to meet your unnecessary short-term financial goals like travel abroad, car purchase etc. in a life cycle act as perfect ingredients to form an unstable financial future. However, NPS schemes here act as a silver lining that is largely focused towards retirement corpus creation. Besides this, in comparison with other investment options, this pension scheme has the lowest NPS fees for fund management.