NPS — Build a Pension While Saving ₹50,000 in Tax

Parun logged into his NPS account one evening and found three rows he had ignored for years: E Fund (42%), C Fund (23%), G Fund (35%). He had never set these. He had no idea whether his money was in the right place, who picked those numbers, or what they meant.

He called the PFRDA helpline. Hold music for 11 minutes. He gave up.

This chapter is what that call should have been.

Tier 1 vs Tier 2: Two Accounts, Very Different Purposes

NPS has two accounts. Most people only need one.

Tier 1 is the retirement account. It is the one you must open first. Contributions are locked until age 60. This is where the tax deductions apply. Minimum contribution: ₹500 per year to keep the account active.

Tier 2 is optional and has no lock-in. You can put money in and take it out whenever you want. But it gives no tax deduction. Think of Tier 2 as a low-cost mutual fund alternative with slightly less flexibility, not a pension account.

Parun only uses Tier 1. He puts in exactly ₹50,000 per year, which is the 80CCD(1B) deduction limit. He saves ₹15,600 in tax. The ₹50,000 then earns equity returns in his NPS account.

The Four Asset Classes: E, C, G, A

Inside NPS Tier 1, your money can go into up to four asset classes. Each works differently.

E (Equity): Invests in stocks of Nifty 50 and Nifty 100 companies. Historically 12-14% CAGR over long periods. Highest potential return. Most volatile in the short term. Maximum 75% of your total NPS portfolio.

C (Corporate Bonds): Bonds issued by Indian companies rated AA or above. Expected return 8-9%. Medium risk, stable over time.

G (Government Securities): Central and state government bonds. Safest of the three. Expected return 7-8%. Very predictable.

A (Alternative Assets): Infrastructure investment trusts, REITs, and similar. Maximum 5% of your portfolio. Most investors skip this.

For someone with 20+ years to retirement, E is where you want the majority of your money. The long time horizon smooths out short-term volatility. The compounding difference between E and G over 20 years is not marginal.

Active Choice vs Auto Choice: You Decide

You set how your money is split across E, C, G, and A. Two ways to do it:

Active Choice: You pick the exact percentages (e.g., 75% E, 15% C, 10% G). You can revise the allocation once per year. This is the right option for anyone who has read this chapter.

Auto Choice: The fund house manages the allocation automatically. Equity reduces as you age. Three sub-options:

• Aggressive: Starts at 75% equity at age 18, reduces to 15% equity by age 55
• Moderate: Starts at 50%, reduces to 10% by 55
• Conservative: Starts at 25%, reduces to 5% by 55

Auto Choice is for people who genuinely do not want to think about allocation. Active Choice at 75% E is better for most working adults in their 30s and 40s.

The Three Tax Deductions: Know All of Them

NPS has three separate tax sections. Each applies differently. Together, they can be substantial.

80CCD(1): Deduction for your own NPS contribution, up to 10% of salary. This sits inside your existing ₹1.5 lakh 80C limit. If you have already maxed 80C through EPF, PPF, or ELSS, this section adds nothing extra.

80CCD(1B): This is the one that makes NPS uniquely valuable. An additional ₹50,000 deduction, entirely separate from the ₹1.5 lakh 80C ceiling. No other investment gives you this. For someone in the 30% bracket, it saves ₹15,600 in tax each year. Just from ₹50,000 invested.

80CCD(2): If your employer contributes to NPS on your behalf, you can deduct that too, up to 10% of salary. This is over and above your 80C and 80CCD(1B). Some corporate employers include NPS as part of the salary structure precisely for this reason.

How to Open an NPS Account

NPS accounts are opened through a Point of Presence (PoP), which includes most banks and post offices.

Easiest route (online):

1. Visit enps.nsdl.com or enps.kfintech.com
2. Complete registration using Aadhaar-based eKYC (takes 10 minutes)
3. Select your CRA (Central Record Keeping Agency): NSDL or KFin Technologies
4. Pick a pension fund manager (PFM)
5. Set your asset allocation
6. Make your first contribution (minimum ₹500)

You get a PRAN (Permanent Retirement Account Number) within 3-5 working days.

Which fund house (PFM) to choose:

Available options: SBI Pension Funds, LIC Pension Fund, HDFC Pension, ICICI Prudential Pension, UTI Retirement Solutions, Kotak Mahindra Pension, Aditya Birla Sun Life Pension.

All are PFRDA-regulated. Long-term equity performance has been broadly comparable across fund houses. SBI Pension is the largest by AUM. HDFC and ICICI Prudential have had strong 5-year equity returns. Check latest NPS equity fund rankings on the PFRDA website before choosing.

You can switch fund houses once per year, so this is not a locked-in decision.

What Happens When You Turn 60

When Parun turns 60, he exits NPS. Here is the exact split:

60% lump sum: Fully tax-free. He can invest this anywhere: SCSS, mutual funds, FDs, or just keep as cash buffer.

40% annuity (compulsory): This portion must be used to buy an annuity from a PFRDA-approved insurer. An annuity pays a fixed monthly income for life (or a chosen period).

The annuity weakness is real. Current annuity rates in India run at about 5-6% annual effective payout. Your NPS E fund historically returns 12-14%. The forced 40% annuity loses the long-term compounding advantage of the rest of the portfolio. And most annuities are fixed in rupee terms, which means inflation erodes them year by year.

This is the main reason NPS gets criticized. But the ₹50,000 tax deduction under 80CCD(1B) still makes NPS worth using, even with the annuity condition. You are getting ₹15,600 back in tax savings per year. That funds a large part of the ₹50,000 investment by itself.

NPS in the Full Retirement Picture

NPS is not a replacement for EPF or PPF. It is an addition to the stack.

EPF: mandatory for salaried employees, 8.25% guaranteed, employer-matched. PPF: voluntary, 7.1% guaranteed, fully EEE, 15-year lock-in. NPS: market-linked equity growth potential, plus the unique ₹50,000 extra deduction.

Parun's retirement allocation:

• EPF (mandatory): ₹5,876/month, automatic, employer-matched
• NPS (Tier 1): ₹50,000/year for the 80CCD(1B) deduction
• PPF: ₹1,00,000/year for guaranteed tax-free stability
• Nifty 50 index fund SIP: ₹10,000/month for uncapped equity growth

NPS earns its spot in this stack primarily through the extra ₹50,000 tax deduction. That alone justifies the account.

This chapter is part of the Retirement Planning course on Finuraa. It is educational content, not personalized financial advice. Consult a SEBI-registered investment advisor for guidance specific to your situation.