Why are corporate employees opting for NPS for long-term wealth generation?

With more private sector employees opting for the National Pension System (NPS) for their retirement savings, the government-run pension scheme is gradually gaining acceptance as a vehicle for long-term wealth generation among investors across categories of employers.

Sample this: Out of a total of ₹11,76,862 crore worth of assets under management of NPS as of May 31, 2024, the assets owned by corporate subscribers stand at 1.75 lakh crore, i.e., 14.8 per cent of the total size of assets.

The assets held by corporate employees have consistently jumped in the past few years. In 2021-22, the size of assets held by corporate employees stood at ₹90,634 crore, according to the data shared by NPS Trust.

This rose to ₹1.17 lakh crore in 2022-23 and to ₹1.66 lakh crore in the following year, 2023-24.

(Source: npstrust.org.in; Data as on May 31, 2024)

One of the key reasons for choosing NPS as a sound retirement option could be the high returns they offer.

There are 10 pension fund managers which are authorised to manage NPS assets and the past one-year returns range between 31 to 41 percent for investment in equity. It is vital to mention here that the investment in NPS is spread across asset classes i.e., equity, corporate debt, government bonds and alternative investment funds.

In the past three years, the return on equity (Tier-I) was in the range of 18-20 percent across pension fund managers.

Likewise, the past five-year return on equity across pension fund managers was in the range of 17-18 percent.

Tax benefits

It is vital to note that NPS does not offer any fixed returns since they are market-linked. The contribution to NPS is eligible for tax exemption. Taxpayers are eligible for deduction under section 80 CCD(1) up to 10 percent of salary up to a maximum threshold of ₹1.5 lakh.

NPS subscribers are entitled to a further deduction of ₹50,000 under section 80CCD (1B) over and above the overall ceiling of ₹1.5 lakh.