How to Maximize Returns from Your NPS Investment

Retirement planning is no longer optional – it is now an important piece of the puzzle to ensure long-term financial independence from earning money over time. With increasing living costs and life expectancy, the need for a future corpus to sustain yourself is even more apparent. The National Pension System (NPS), launched by the Government of India, is the best-known way to ensure you have solid retirement savings, as well as defined, disciplined savings and tax benefits – all in one product.

By investing your contributions in a designed portfolio of equity, corporate bonds and government securities, the NPS gives you growth capital while also taking on sensible risks. However, simply investing in an NPS product is not enough. To develop better returns from your investment, as a consumer, you will need to implement clever strategies to improve returns if you want to ensure you have a reliable and equitable living from your retirement spending situation.

Understanding the National Pension System

The National Pension System is a voluntary and long-term retirement saving scheme and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Subscribers contribute regularly over the term of their working life, which gets invested in a mixture of assets, such as:

• Equity (E): High risk, with higher returns.
• Corporate Bonds (C): Moderate risk, moderate returns, relies mostly on income.
• Government Securities (G): Low-risk, low returns.
• Alternative Investment Funds (AIF): High-risk, high-returns.

With time, the contributions will grow into a large retirement fund. When the subscriber officially retires, a total of 60% of the accumulated fund can be taken tax-free. The remaining 40% of the funds must be used to buy an annuity with the purpose of paying the subscriber a pension.

In addition to the tax-free withdrawal, the NPS has tax benefits:

• Section 80C: Up to ₹1.5 lakh for voluntary contributions – from the total income in the old tax regime.
• Section 80CCD(1B): A further exclusive deduction of ₹50,000 in the old tax regime.
• Section 80CCD(2): For employer contributions (up to 10% of salary from the old tax regime; up to 14% of salary from the new tax regime). Salary means basic salary and dearness allowance.

Strategies to Maximise Returns from Your NPS Investment

1. Get Started Early to Allow Time to Work for You
   When it comes to creating wealth, time is our greatest ally. By starting your NPS contributions early in your working life, you can let compounding work to your benefit over the course of decades. Even small contributions regularly can add up over the course of your investing career. For that reason, younger investors can afford a greater percentage to equities, which have better returns over time.
2. Maintain an Age-Appropriate Asset Allocation
   Asset class exposure is critical in avoiding too high levels of risk relative to the return a NPS investor is expecting. Younger investors can afford to maintain higher levels of equities versus bonds or debt securities. Investors in the last phase of their career should gradually convert equities exposure to safer government securities and corporate bonds.
3. Increase Contributions with Income Growth
   If your contributions are tied to any salary increases, bonuses or promotions, then your retirement corpus will automatically grow commensurately with you. Even a small increase in contribution rate can represent a large amount at retirement.
4. Regularly Review and Rebalance Your Portfolio
   The market is likely to adjust your balance of investments over time. Regular reviews and portfolio rebalancing will help you keep your portfolio within your risk tolerance and retirement goals. A disciplined approach will reduce the chances of being over-weighted in volatile assets
5. Opt for Auto-Choice if Unsure
   For those investing with good intentions, NPS has an Auto-Choice option to improve your asset allocation as you age, gradually decreasing the exposure to equities and increasing safer assets. The pre-determined investment strategy balances your potential for growth while reducing your risk.
6. Integrate NPS with LIC Annuities
   While NPS helps to develop a retirement corpus, using LIC annuity products together with NPS will provide a guaranteed monthly income at retirement. Using this combination will provide a system that is both tax-efficient and financially secure.
7. Plan Withdrawals Strategically
   On retirement, you are permitted to withdraw up to 60% of your NPS corpus tax-free. The remaining 40% cannot be withdrawn but must be invested into an annuity that earns you a lifetime pension. If you were to buy only LIC annuities, you would benefit from an insurance product that continuously provides predictable income to support you throughout your retirement.

FAQs on Maximising NPS Returns

Conclusion

In order to receive the best returns from the NPS, you need to remain disciplined and maintain a well-diversified investment portfolio that maximises all asset allocation options. Taking the time to invest early to benefit from compounding, both from a money management perspective and contribution perspective, and reviewing your portfolio with a systematic method converts NPS from a simple retirement solution into a significant wealth-creating cash flow for your lifetime.

In combination with the LIC annuity products of your choice, the NPS will provide you with a growing income stream, and will guarantee income to provide risk balance against market-related fluctuations during the retirement phase of your life. Using these financial products together will offer you a tax-efficient model for the future that allows you financial independence and a dignified standard of living in your retirement years.