Can NPS help you retire early? Know what PFRDA chairman says

The flexible features of the National Pension System (NPS) can be used to achieve multiple financial goals, including early retirement, according to PFRDA chairperson Dr Deepak Mohanty.

Speaking at a media event on retirement in Mumbai recently, Dr Mohanty said NPS provides a very low entry threshold, making it a people’s product.

You can keep an NPS account active only with an annual contribution of ₹1,000. Subscribers are not required to contribute every month. These features make NPS suitable even for those with irregular income.

Furthermore, there is no upper limit for contribution to NPS. The PFRDA chairperson said this feature can be used to save larger sums for bigger financial goals like early retirement.

"It has its own advantage. For example, youngsters contemplating to retire early can front-load their contribution to achieve their retirement goal," Dr Mohanty said.

An NPS subscriber can also defer his/her exit and stay invested in NPS up to 75 years of age. Additionally, the subscriber can withdraw the lumpsum amount in the form of systematic lumpsum withdrawal (SLW) in a phased manner up to the age of 75 years or withdraw anytime the entire amount.

Tax efficiency

NPS offers tax efficiency for both employees and employers. Dr Mohanty said both the employer and employee enjoy income tax deductions up to 14% of the employee’s salary contributed to NPS under the new tax regime. Under the old tax regime, there is an additional benefit of ₹50,000, exclusively for NPS.

Pension fund selection

NPS also allows flexibility in selecting pension funds and asset allocation. It offers auto-choice and active-choice of asset allocation.

"In auto-choice, one gets to select any one of the four life cycle funds which balance risk with age among various asset classes. For example, as one ages, the equity allocation tapers down.

Alternatively, there is an active choice where the subscribers choose their mix of asset classes depending on their risk appetite. For example, one can invest up to 75 percent in equity, irrespective of one’s age," Dr Mohanty said.

NPS returns

According to Dr Mohanty, the average annual returns since inception under the equity scheme of NPS have been over 13%, with 9% for the corporate debt scheme and 8.8% for the government securities scheme.

Currently, there are around 1.6 crore NPS subscribers, including 96 lakh government subscribers and 64 lakh private subscribers, including 42 lakh individual subscribers, with a total corpus of over ₹13 lakh crore.