Budget 2025: NPS Asset Allocation Options And Income Tax Deductions — Explained

With one of the largest subscriber bases in the country, National Pension Scheme or NPS is one of best instruments available to build a pension fund. The scheme has provided 9-12% returns in the past and investors have a few options when it comes to exposure to various asset classes.

Subscribers can choose to actively decide how their contribution is invested or they can pick a pre-decided portfolio.

The tax benefit of the scheme is broadly under the old tax regime. An investor can invest up to Rs 1.5 lakh under Section 80CCE and tax exemption is provided on annuity purchase or superannuation at retirement under Section 80CCD.

As things stand, investors can withdraw up to 60% of the corpus in lumpsum after retirement, with the remaining 40% going into an annuity plan. Subscribers can also withdraw the entire corpus tax-free if it is less than or equal to Rs 5 lakh without purchasing an annuity.

There is also tax deduction of up to Rs 50,000 under Section 80CCD, with the overall limit of Rs 1.5 lakh under Section 80CCE. An important change to note is that during Budget 2024, the contribution allowed by employers was increased to 14% from 10% of the salary. This change will be effective April 1, 2025.

When investing in the National Pension Scheme, investors can choose their method of investment.

In the active choice method, the subscriber can actively decide how their contribution is to be invested. The subscriber has to provide the Pension Fund Manager the asset class as well as percentage allocation that goes into each scheme.

There are four asset classes: Equity, Corporate debt, Government Bonds and Alternative Investment Funds, including instruments like REITS, AIFs, Invlts etc. While the subscriber gets to choose, there are conditions like maximum permitted equity exposure is 75% up to 50 years of age. 

Here, the maximum equity exposure keeps decreasing and there is only 50% exposure for those who are above 60 years of age. Further, the percentage contribution value cannot exceed 5% for Alternative Investment Funds.

If the investor does not want to actively choose their asset allocation, then they can choose life-cycle fund where the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio.

For subscribers who want to reduce exposure to more risky investment options as they get older, Auto Choice is the best option. With advancing age, an individual’s exposure to equity and corporate debt tends to decrease in this model.

Within a life-cycle fund, there are a few options as well.

The Aggressive Life Cycle Fund provides up to 75% of total assets to equity. The Moderate Life Cycle Fund takes on a 50% exposure to equity and finally, the Conservative Life Cycle Fund offers a 25% exposure of the total assets for equity investments.