Save for your retirement with National Pension System (NPS)

A comfortable retirement is the ultimate goal we all work for, but the available data shows that the vast majority of Indians are probably not prepared for retirement. Let me give you some numbers to illustrate the point. The National Stock Exchange (NSE) has about 9 crore unique investors registered with it. So the total number of unique Indian investors with demat accounts will be in this range since NSE is the biggest exchange. There are just about 4.3 crore unique mutual fund investors. But if you look at this as a whole, only 4.7% of total household assets are invested in equities.

The most popular savings avenue for the vast majority of Indians is bank fixed deposits (FDs), with over Rs 100 lakh crore. Provident funds are the next popular option. There were 29 crore subscribers, with 6.8 crore active subscribers. The other popular investment options for most Indians are insurance policies like endowment policies and unit-linked insurance plans (ULIPs). The rest is invested in property and gold. This makes most Indians asset-rich and cash-poor.

This is just the asset side of Indian household balance sheets. Even without looking at the liability side, you can safely assume that most Indians are probably not investing as much as they should be for a comfortable retirement. We no longer live in a world of defined-benefit pensions where the employer would guarantee a pension. It’s up to us to prepare for retirement. In fact, some experts would argue that India is already facing a pension crisis due to the nature of the government’s pension liabilities.

Over the 13 years of Zerodha, our mission has naturally evolved from just providing traders and investors with the best tools to helping them do better with their money. A big aspect of that mission is to help people prepare for their retirement. It was with this goal in mind that we applied for the National Pension System (NPS) license and got it a couple of years ago. Due to a few regulatory challenges, it has taken us some time to launch. Since NPS will be on Coin, its launch was delayed due to the discontinuation of the pooling mechanism for mutual funds. This was a huge change for us, and it was as good as rebuilding Coin from scratch.

But we’re happy to announce that NPS is now live on Coin.

Why National Pension System (NPS)?

NPS is a brilliant option for saving for your retirement because it forces you to invest in a diversified portfolio of equities and debt by default. It’s also one of the cheapest investment options out there and tax-efficient. Since NPS is a product aimed at helping people prepare for retirement, it comes with a lock-in. All NPS investments are locked until the subscriber turns 60, after which you can withdraw the money.

This lock-in is a feature, not a bug. AMFI publishes data on what percentage of investors hold their assets for what period. As per the latest data available, only 50% of investors held their equity funds for more than 2 years. AMFI doesn’t disclose the data, but anecdotally, the longer you look at this data, the shorter the holding period becomes. So the lock-in period in NPS stops people from potentially doing silly things.

There are two ways of investing in NPS.

Active choice

Under active choice, you can choose how much to invest in equity (E), government bonds (G), and corporate bonds (C). For example, 50% in equity, 25% in government bonds, and 25% in corporate bonds. The maximum allocation to equity is 75%, and for bonds, it’s 100%.

There are 10 pension fund managers, such as ICICI, HDFC, and others, who manage the investments under the NPS. You can choose who to invest with.

Auto choice

If you don’t want to actively choose the allocation, you can choose the auto choice instead. Under auto choice, your allocation to the two asset classes will be decided automatically based on your age. The younger you are, the higher the allocation to equity, and vice versa. Here’s an illustration of how the allocation will look under the aggressive plan of auto choice. Similarly, there are moderate and conservative options under auto choice.

Tax benefits

Investments in NPS are eligible for tax deductions of up to Rs 50,000 under Section 80CCD. This is over and above the deduction limit of Rs 1.5 lakh under Section 80C. So, in other words, by investing in, say, ELSS and NPS, you can claim deductions up to Rs 2 lakh.

Upon maturity, you can withdraw 60% of the corpus, and this is tax-free. The remaining 40% has to be compulsory annuities. Annuities are financial products that take a lump-sum payment and provide regular income. So, let’s say you buy an annuity of Rs 1 crore. Insurance companies that sell annuities take that Rs 1 crore and pay a monthly amount. So the logic is that this 40% becomes your pension.

Mutual funds vs. NPS

Both NPS and mutual funds have their merits, and I don’t think it’s a question of what is good and what is bad. Using NPS for your core retirement investments and then complementing that with mutual funds works well.

Charges for investing in NPS

An account opening fee of Rs. 200 is charged. A fee of 0.25% of the investment amount + GST or Rs. 30 + GST, whichever is higher, is charged on each contribution. Other charges apply as specified by the regulations.

How to invest

NPS is currently live on Coin web and will soon be available on the Coin mobile app. Click here to invest.

What’s next for NPS on Coin?

The transactional journeys are live on Coin. We are working on adding more tools, such as calculators, financial planning tools, and better data about pension funds, scheme performance, and allowing Tier 2 accounts. We’re also working on integrating mandates to help you create SIPs.

Only new NPS subscribers can invest. We are working on allowing existing NPS subscribers to move their accounts to Zerodha.

Useful NPS tools

NPS pension calculator
Historical performance of NPS schemes