9. Corporate NPS

A friend pinged me: “My company is offering corporate NPS. Should I go for it?”

The National Pension Scheme (NPS) has gained momentum over the past few years. It’s a retirement savings plan in which you set aside money during your working years to build a nest egg.

Budget 2024 made corporate NPS more attractive by giving tax benefits on employers’ contributions (up to 14% of basic+DA) under the new tax regime.

Just so you know, the new regime doesn’t offer any tax breaks for ‘individual’ NPS contributions. So routing it through your employer helps save taxes.

A few companies already offer corporate NPS, and many others are considering it, too.

If you are a private sector employee, here are a few things you must know before opting for it.

First, a quick refresher on EPF

You and your employer each contribute 12% of your basic salary (basic + DA) every month. This is compulsory and mandated by law. It continues regardless of whether you choose NPS or not.

Your share shows up as a deduction in your payslip, but not your employer’s – it’s typically part of your CTC (cost to company). It’s pretty straightforward.

How corporate NPS works

The company deducts it from your pay, sends it to NPS, and handles the back-end costs of investing it.

The term ‘employer contribution’ is just tax lingo. In reality, it’s deducted from your salary and invested for you.

Of course, in some cases, companies, too, chip in from their side, but that depends on your company’s policy.

What happens when you opt in?

1. You save on taxes – 14% of the employer’s contribution can be deducted from your income (10% under the old tax regime).
2. Your take-home dips – Because, when you opt in, NPS contribution is deducted from your payslip.
3. You save for your retirement – Without feeling the pinch, you would regularly save for your retirement years.

Let’s talk pros and cons

Merits

Friction-free saving: In corporate NPS, because the money is deducted before it hits your account, you don’t have to wrestle with the question, “How should I invest this?” The power of automatic deductions is seriously underrated. Multiple studies show that people end up saving significantly more simply because the process is automatic.

Withdrawal restrictions: “Out of sight, out of mind.” Once your money goes into NPS, it’s locked until you turn 60. You can’t touch it except for genuine emergencies. This prevents you from dipping into your retirement savings when it feels absolutely necessary, but you’d regret it later.

Mandatory annuity at retirement: When you retire, you don’t get 100% of your NPS savings upfront. You can withdraw only 60% and 40% of your corpus must go toward buying an annuity (a product that pays you a fixed pension for life).

While the mandatory annuity requirement seems to limit what you can do with your own money, the upside is that it ensures a steady income in old age.

Equity exposure: Unlike EPF, which is a fixed-income product, NPS lets you allocate up to 75% to equity. In a country where inflation typically runs 4–6%, that equity exposure is essential for growing your retirement fund.

Going by the past, the NPS equity returns are more or less close to broader market returns.

Now, the demerits

I smirk at myself as I write this, because the same features I just praised are about to become problems.

Tough withdrawal rules: If you lose your job, face a disability, or start an entrepreneurial venture, your NPS is mostly out of reach. Even in serious cases like 75% disability, you can’t pull it out entirely.

Of course, NPS is meant for retirement, and one should have an emergency fund for other needs. But practically, people also view retirement funds as a cushion for unforeseen situations.

Equity cap: EPF already pushes you heavily toward debt. So if you’re young and want your other retirement savings to be equity-heavy to maximize returns, NPS caps you at 75%.

Tax saving bias: Here’s a behavioral trap: We often overvalue today’s tax savings. I ran a quick back-of-the-envelope calculation: a young person investing 100% in an equity index fund for 30 years will likely beat NPS returns, even after tax savings.

This is not surprising because when you invest in NPS, you also invest in government securities and corporate bonds alongside equity.

Low annuity returns: While annuities (which you buy with 40% of your corpus at 60) provide security, the annuity products available are not attractive in terms of returns—at least not currently.

The verdict

1. If you genuinely like the NPS product and are comfortable with its structure and long-term nature, go for it.

2. You struggle with saving consistently. As they say, half the battle in investing is behavioral, and NPS forces you to stay disciplined.

3. Peace of mind over optimization. NPS may not give the highest returns on your investments, but if you prefer the psychological comfort of having a safety cushion, it works.

4. You already have an individual NPS account. Converting between individual and corporate NPS accounts is not a big hassle. Why lose out on tax benefits when you can route the same investments via corporate NPS?

Consider opting out if…

1. Your take-home pay matters more right now. Since NPS comes on top of EPF, contributions can squeeze your monthly cash flow.

2. You’re not okay with the lock-in. If you prefer full control over your money or dislike the mandatory annuity at 60, then NPS isn’t your cup of tea. This is assuming that you can manage your investments well.

3. You plan to retire early. A lock-in until 60 won’t suit you unless you’re building a separate retirement pool elsewhere.

4. You want higher equity exposure. If you’re young and aiming for an aggressive 100% equity allocation for retirement, NPS’s 75% cap can feel restrictive.

One last note..

The 10% or 14% NPS contribution from your salary may or may not cover all your retirement needs. If you haven’t run the numbers yet, check our earlier newsletter—”How much money do you need for your retirement?“— as a starting point.

Key takeaways

1. Corporate NPS offers tax savings on employer contributions, but reduces immediate take-home salary.

2. Automatic deductions ensure consistent, disciplined retirement savings without requiring active investment decisions.

3. Withdrawals are restricted until age 60, with 40% mandatorily converted into annuity income.

4. Equity allocation is capped at 75%, limiting aggressive growth potential for younger investors.

5. NPS prioritizes stability and discipline over maximum returns, suiting savers who value peace of mind.