NPS deep dive
In this chapter: Tier I, Tier II, asset-class allocation · Active vs Auto choice; PFM selection
NPS Tier I is the mandatory retirement account: 60% lump sum + 40% mandatory annuity at age 60. Tier II is voluntary, liquid, no tax benefit. Asset classes: E (Equity, max 75% under 50yr), C (Corporate Debt), G (Government), A (Alternatives). Mode: Active (you choose allocation) or Auto (lifecycle glide path).
Active mode: choose your own allocation, max 75% E under age 50, glides to 50% by 60. Most aggressive Auto setting (LC75): 75% E max, glides to 15% E by 60 — too conservative for many. Better for under-50 high-risk-capacity subscribers: Active mode with 75% E. PFM selection: ~7 PFMs (HDFC, ICICI, SBI, UTI, etc.). Performance differences within ±50 bps over 5 years; consistency more than absolute returns. Subscribers can change PFM and allocation once a year. NPS contribution under 80CCD(1) (within 80C cap), 80CCD(1B) (additional ₹50K), 80CCD(2) (employer's contribution, not capped against 80C).
A nuanced point: NPS Tier I has lock-in to 60 + mandatory 40% annuity at sub-inflation yields (5.5-7%). For a young high-saver, this is suboptimal capital allocation. Better strategy: contribute up to 80CCD(1B) ₹50K extra (saves ~₹15K tax for 30% bracket) and any employer 80CCD(2) match (free money), but don't over-contribute to NPS Tier I. Use direct mutual fund SIPs and equity-tilted PPF for the rest. Most people over-contribute to NPS based on marketing; sophisticated planning under-contributes.