National-pension-system

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What is NPS? The National Pension System (NPS), earlier known as the New Pension Scheme, is a pension system open to all citizens of India. The NPS invests the contributions of its subscribers into various market linked instruments such as equities and debts and the final pension amount depends on the performance of these investments. It has an applicable interest rate of 12% to 14% on contributions made.

Any Indian citizen in the age group of 18-60 can open an NPS account. NPS is administered and regulated by the Pension Fund Regulatory Authority of India (PFRDA). The NPS matures at the age of 60 but can be extended until the age of 70.

Partial withdrawals up to 25% of your contributions can be made from the NPS after three years of account opening but for specific purposes like home buying, children’s education or serious illness.

NPS Asset Classes

National Pension System (NPS): Eligibility, Types, Investment & Charges

The National Pension System has four asset classes. Asset Class E invests in equities or stocks. Asset Class C invests in Corporate Bonds. Asset Class G invests in Central and State Government Bonds and Asset Class A invests in alternative assets like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs).

NPS Asset Classes
Class Investment Asset
E Equity
C Corporate Bonds
G Government Bonds
A Alternative Assets like REITs & InVITs


Investment Choice & NPS Asset Allocation

Under National Pension Schemes, you can either pick your own asset allocation (Active Choice) or outsource it to your NPS fund manager (Auto choice). It is recommended to opt for Auto Choice until you have good knowledge and experience of investing in market linked investment options.

Active Choice

In Active Choice, the subscriber picks the desirable split of his NPS deposits between equities, corporate bonds, government bonds and alternative assets on his own. The NPS subscriber needs to provide Pension Fund Managers (PFM), asset allocation matrix and the percentage allocation to be done to each of the asset classes of NPS.

Out of the 4 asset classes i.e equity, corporate bonds, government bonds & alternative assets, the allocation to equities cannot be more than 75% of the corpus and that too is valid only up to 50 years of age. From 51 years onwards the allocation to equity starts tapering off as per a defined matrix. Similarly, your contribution towards Alternative Investment Funds (AIF) can not be more than 5% of your corpus.

Equity Allocation Matrix in Active Choice:

Equity Allocation Matrix
Age Max. Equity Allocation
Upto 50 years 75%
51 years 72.5%
52 years 70%
53 years 67.5%
54 years 65%
55 years 62.5%
56 years 60%
57 years 57.5%
58 years 55%
59 years 52.5%
60 years 50%

Auto Choice

In Auto Choice, the lifecycle fund that you have chosen does the asset allocation process for you (maximum equity allocation is again 75%). The fund also automatically rebalances your asset allocation as you get older towards less equity and more debt.

You can change your asset allocation up to two times in a financial year. Asset Class A (Alternative Assets) is only offered in NPS Active Choice and the upper limit for investing in it is 5% of your corpus.

Please see the table below for asset allocation in each life-cycle fund:

Aggresive Conservative Moderate
Age E C G E C G E C G
Upto 35 Years 75% 10% 15% 25% 45% 30% 50% 30% 20%
40 55% 15% 30% 20%
35% 45% 40% 25% 35%
45 35% 20% 35% 15% 25% 60% 30% 20% 50%
50 20% 20% 60% 10% 15% 75% 20% 15% 35%
55 15% 10% 75% 5% 5% 90% 10% 10% 80%
Asset Class E = Equity C = Corporate Bonds G = Government Bonds

NPS Returns

NPS does not have a fixed interest rate but the returns are market-linked. Money contributed to the NPS account can be invested in up to 4 asset classes – equities, corporate bonds, government bonds and alternative assets through various pension funds. These pension funds earn returns linked to the performance of stocks and bonds. The returns on different NPS funds are shown below :

NPS SCHEME Returns as on 30-September-2019

Pension Fund/SCHEME - E Tier-I Returns 1 Year Returns 3 Year Returns 5 Years
UTI Retirement Solutions Ltd 4.44% 9.44% 8.51%
SBI Pension Funds Pvt. Ltd 3.94% 9.16% 8.18%
LIC Pension Fund Ltd 2.26% 7.73% 6.83%
Kotak Mahindra Pension Fund Ltd 7.19% 9.79% 8.50%
ICICI Pru. Pension Fund Mgmt Co. Ltd 4.21% 9.26% 8.00%
HDFC Pension Management Co. Ltd 6.67% 10.97% 9.11%
Birla Sun Life Pension Management Ltd 4.80% NA NA