What is National Pension Scheme (NPS)?
The National Pension Scheme (NPS) is a Central government social security scheme. Except for members of the military services, this pension system is open to personnel from the public, private, and even unorganised sectors. The program encourages employees to invest in a pension account at periodic intervals throughout their employment. After retirement, subscribers can withdraw a portion of the corpus. If you have an NPS account, you will get the rest of the money as a monthly pension after you retire. Previously, the NPS plan only applied to Central government employees. Central government personnel hired on or after January 1, 2004, must participate in the NPS. However, the Pension Fund Regulatory and Development Authority (PFRDA) has now made it available to all Indians voluntarily. The NPS system is extremely valuable to anyone working in the private sector who needs a regular pension after retirement. The scheme is movable across employment and places, and it provides tax benefits under Sections 80C and 80CCD.
Geeky Takeaways:
- Voluntary Retirement Savings: The National Pension Scheme (NPS) is an effort in India that encourages people to save for their retirement.
- Two-Tier Structure: NPS is divided into two tiers, Tier-I, a mandated long-term account with tax advantages, and Tier-II, a voluntary savings account with greater flexibility.
- Professional Fund Management: NPS funds are handled by Pension Fund Managers (PFMs), who invest in a variety of assets, giving members a varied range of investment alternatives.
- Tax Advantages: Contributions to NPS are tax deductible under Section 80CCD, with a further advantage for self-employed individuals.
- Adjustable Withdrawal and Annuity Options: Upon retirement, subscribers can withdraw a portion of the fund and use the balance to purchase an annuity, providing post-retirement income flexibility.
Types of NPS Accounts
Tier I and Tier II accounts are the two major account categories within the NPS. The latter is an extra addition, whereas the first is the default account. The details of the two account categories are provided in the table below.
| Default |
Voluntary |
| As per the rules and regulations |
Permitted |
| Up to ₹2 lakh p.a.(Under 80C and 80CCD) |
₹1.5 lakh for government employeesÂ
Other employees-None |
| ₹500 |
₹1,000 |
| ₹500 per month or ₹1,000 p.a. |
₹250  |
| No limit |
No limit |
Tier-I accounts are required for all participants in the NPS program. The minimum contribution required of Central Government employees is 10% of their base salary. Investment in the NPS is a voluntary choice for all other individuals.
Features of NPS (National Pension Scheme)
1. Voluntary: A Subscriber may contribute at any moment throughout the fiscal year and adjust the amount they wish to set aside and preserve each year.
2. Simple: The subscriber must register an account with any of the POPs (Points of Presence) or via eNPS (https://enps.nsdl.com/eNPS/).
3. Flexible: Subscribers can select their own investment options and pension funds and watch their money increase.
4. Accessible: Subscribers can access their accounts from anywhere, even if they change cities or jobs.
5. Regulated: NPS is governed by the PFRDA, with transparent investing guidelines and frequent monitoring and performance evaluations of fund managers conducted by the NPS Trust.
Benefits of NPS (National Pension Scheme)
1. Returns/Interest: A portion of the NPS is invested in equities (which may not provide assured returns). However, it provides substantially larger returns than other classic tax-saving investments such as the PPF. This plan has been in place for almost a decade and has produced annualised returns ranging from 9% to 12%. In NPS, you can also replace your fund manager if you are dissatisfied with the fund’s performance.
2. Risk Evaluation: The National Pension Scheme currently has an equity exposure cap ranging from 75% to 50%. This cap is 50% for government personnel. In the prescribed range, the equity component will decrease by 2.5% per year beginning with the year the investor turns 50. The cap, however, is set at 50% for investors over the age of 60. This stabilises the risk-return equation in favour of investors, implying that the corpus is relatively protected against equity market volatility. The earning potential of NPS is greater than that of other fixed-income programs.
3. Regulation: The PFRDA supervises NPS through transparent investment standards, as well as frequent performance assessments and monitoring of fund managers by the NPS Trust.
4. Flexibility: The NPS subscription is versatile. NPS members can contribute to the NPS fund at any time during the fiscal year and adjexceptappliesust the amount of their subscriptions. They are free to select their investing possibilities. They can access their account from any place and continue to use it even if they move or change jobs.
Eligibility of NPS (National Pension Scheme)
Anyone who meets the subsequent eligibility requirements is welcome to join NPS,
1. Non-resident Indian (NRI) status or Indian citizenship (resident or non-resident status).
2. Age restriction: 18 to 70 years.
3. Anyone who Applies in compliance with the Know Your Customer (KYC) requirements specified on the application.
4. Anyone who possesses the legal capacity to enter into contracts in accordance with the Indian Contract Act.
5. NPS subscriptions are not available to Persons of Indian Origin (PIOs), Overseas Citizens of India (OCIs), or Hindu Undivided Families (HUFs).
6. Since NPS is a personal pension account, it is not possible to establish it on behalf of a third party.
The eligibility criteria for the National Pension System are also contingent upon the operational NPS models. These consist of,
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Government Sector National Pension System Model
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- The pension system is universally applicable to central and state government employees, with the exception of personnel serving in the armed forces.
- A 10% portion of the salary of government employees is designated for their contribution to the National Pension System, with the government matching this amount. A 14% government contribution is allocated to employees of the Central Government.
- Furthermore, apart from the Government of West Bengal, every state in the nation has adopted the NPS.
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The Corporate Model of the National Pension System
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According to the Corporate Model, corporate employees who are enrolled by their employers can take advantage of the NPS benefits of the pension system. They must be Indian nationals between the ages of 18 and 60, as well as meet the KYC standards.
The model is applicable to the following entities,
- Registered in accordance with the Companies Act.
- Listed under several Co-Operative Acts.
- Central or public sector enterprise.
- A proprietary.
- Registered as partnerships or limited liability companies (LLPs).
- Incorporated by a State or Central Government order.
- Known as a society or a trust.
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All Citizens Model of NPS
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All Indian citizens who match the following qualifying conditions can voluntarily participate in and contribute to the NPS pension system for their retirement security.
- He or she must be between the ages of 18 and 60 on the date of application with a PoP service provider.
- He/she must meet the KYC standards outlined in the Application Form and submit all essential papers.
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Who Should Invest in NPS (National Pension Scheme)?
The NPS is a useful scheme for anybody who wishes to start planning for retirement early and has a low-risk tolerance. A periodic pension (income) in the years following retirement would undoubtedly be beneficial, particularly for those who retire from private-sector jobs. This type of regular investment can make a significant impact on your life after retirement. In reality, salaried individuals who want to maximise their 80C deductions should investigate this plan.
How to Open a NPS (National Pension Scheme) Account?
The NPS is subject to regulation by the Pension Fund Regulatory and Development Authority (PFRDA), which provides access to this account through both online and physical channels.
1. Offline Procedure
Step 1: To set up a manual NPS account, it is necessary to locate a PFRDA-registered Point of Presence (PoP), which may also be a financial institution. Collect an application form from the Point of Contact in the area and attach it to the KYC documents. You can also ignore this step if the status of your KYC compliance is completed with your bank.
Step 2: PoP will issue a PRAN – Permanent Retirement Account Number – to you upon completion of the initial investment (minimum of ₹500 or ₹250 monthly or ₹1,000 annually). The sealed welcome packet containing this number and password will assist you in managing your account. A one-time registration fee of ₹125 is required to complete this procedure.
2. Online Procedure
Currently, the time required to establish an NPS account is under thirty minutes. It is simple to create an account online (enps.nsdl.com) by linking your account to your PAN, Aadhaar, and mobile number. The registration can be verified by entering the OTP that is sent to your mobile device. You will be issued a PRAN (Permanent Retirement Account Number) that can be used to access the NPS.
Individuals can use the online portal eNPS to register for and subscribe to the National Pension System. The following procedures can be taken to register for the scheme.
Step 1: Go to the eNPS portal on the National Pension System’s official website.
Step 2: Select the membership type from the ‘Individual subscription’ and ‘Corporate Subscriber’ options.
Step 3: Select a suitable residential status. ‘Citizen of India’ and ‘NRI’ are two options.
Step 4: Select either a Tier I account or both accounts, as the former is required for long-term savings.
Step 5: Enter your PAN and choose a bank or point of sale. For KYC verification, it is best to choose a PoP with whom you already have a relationship, such as a savings/current/Demat account, because the chosen PoP will do it.
Step 6: Attach a scanned copy of your PAN card and a canceled check. The image format must be .jpg, .jpeg, or .ng, with a file size of 4KB to 2MB.
Step 7: After that, upload your scanned picture and sign in the identical format and size as described previously.
Step 8: Once you’ve been directed to the payments gateway, use net Banking to pay the applicable fees.
Step 9: Upon payment completion, your Permanent Retirement Account Number will be generated.
NPS Withdrawal Rules after Retirement (60 years)
A maximum of 60% of the entire fund may be withdrawn in a single sum at this time; the remaining 40% is invested in an annuity plan. In accordance with the new NPS regulations, subscribers may withdraw the entire fund if it is equal to or less than ₹5 lakh, without the need to purchase an annuity plan. Likewise, these withdrawals are exempt from taxation.
A person with a corpus of ₹4.5 lakh, for instance, is eligible to withdraw the entire amount upon retirement. If the amount held exceeds ₹10 lakh, however, withdrawals are subject to a ₹6 lakh tax. In the amount of the remaining ₹4 lakh, an annuity plan is required.
While withdrawals are exempt from taxation, the taxability of an annuity depends on the taxpayer’s income classification. Thus, an annuity with a value of ₹4 lakh will be subject to taxation at the rate of the individual’s tax classification. Taxation on the payment is dependent upon the year of payment.
NPS Early Withdrawal or Exit Rules
1. Upon Superannuation: Upon reaching the age of 60, or the age of superannuation, a minimum of 40% of the accumulated pension corpus must be used to purchase an annuity that delivers a recurring monthly pension for the contributor. The remaining funds are easily accessible in the form of a single-sum withdrawal. A single sum withdrawal of 100% is permissible for subscribers whose total accumulated pension fund is equivalent to or less than ₹5 lakh.
2. Pre-Mature Exit: Before reaching the age of superannuation or turning 60, a minimum of 80% of the subscriber’s accumulated pension fund must be used to purchase a monthly income-generating annuity in the event of a premature exit. The subscriber may execute a single sum withdrawal of 100% if the total corpus is equal to or less than ₹2.5 lakh.
3. Demise: Subsequent to the subscriber’s demise, the designated legal beneficiary or designated pension fund in the full amount (100 percent) would be an advanced payment.
Equity Allocation Rules for NPS
The NPS invests in various schemes, with equity investments comprising Scheme E. A maximum of 50% of one’s investment may be allocated to equities. Investing alternatives include active choice and automatic choice. The age-based risk profile of your investments is determined by the automatic selection. For instance, investments become more secure and less risky as one ages. You can determine the scheme and allocate your investments through active choice.
Option to Change the Scheme or Fund Manager
NPS provides the option to switch funds or fund managers if one is dissatisfied with their performance. This option is open to accounts of Tiers I and II.
NPS Returns for Tier I & Tier II Accounts
The interest rate of the NPS is dependent upon the performance of the assets. Thus, it is impossible to predict in advance the quantity of return that will be received upon retirement. NPS is a market-linked product in which alternative assets, government debt, corporate debt, and equity can be invested in. After the asset combination and fund manager have been determined, the capital is allocated to particular schemes that invest in the aforementioned four asset classes.
Additionally, NPS permits the establishment of two accounts, Tier I and Tier II. As of December 31, 2022, the following returns are displayed for tier I and tier II accounts at the current NPS interest rate,
NPS Tier 1 Returns:
| 15.33-18.81% |
13.11-15.72% |
10.45-10.86% |
| 12.46-14.47% |
9.27-10.15% |
10.05%-10.64% |
| 12.95-14.26% |
10.29-10.88% |
9.57-10.05% |
| 3.98-16.73% |
NA |
NA |
NPS Tier 2 Returns:
| 15.19-17.92% |
13.05-15.83% |
10.35-10.58% |
| 12.71-16.36% |
9.55-10.17% |
9.86-10.60% |
| 12.61-13.42% |
10.40-12% |
9.59-10.07% |
Tax Deductions for Investments in the NPS (National Pension System)
The following sections provide NPS tax benefits for National Pension Scheme investments.
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U/S 80CCD (1)
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Own contribution of the scheme subscriber towards Tier I investments is tax-deductible within the total ceiling of ₹1.5 lakh u/s 80C.
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U/S 80CCD 1(B)
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In addition to deductions under section 80CCD (1), subscribers are also allowed up to ₹50,000 as deductions towards Tier I contributions.
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U/S 80CCD (2)
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Contribution of an employer towards Tier I investments is eligible for a deduction of up to 14% for central government contributions and up to 10% for others. This deduction is over and above the deduction limit applicable u/s 80C.
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Comparison of the NPS Scheme with Other Tax Saving Instruments
| 9% to 12% (expected) |
Till retirement |
Market-related risks |
| 10% to 12% (expected) |
3 years |
Market-related risks |
| 7.1% (guaranteed) |
15 years |
Risk-free |
| 5% to 7% (guaranteed) |
5 years |
Risk-free |
Although NPSs can generate better returns than PPFs or FDs, they are not as tax-efficient when they mature. For example, you can withdraw up to 60% of the total money in your NPS account. 20% of this is subject to taxation. The taxation of NPS withdrawals is subject to change.
Frequently Asked Questions (FAQs)
1. Who will manage my NPS investments?
Answer:
In accordance with the terms of the PFRDA Act, pension funds have responsibility for investing investments, accumulating them, and administering pension fund through various plans within the National Pension System.
2. What investing options are available in NPS?
Answer:
NPS provides two options for investing in your account: Active selection and Automatic selection
The subscriber decides the allocation % in asset classes in Active selection; however, in Auto choice, funds are automatically allocated across asset classes in a pre-defined matrix based on the subscriber’s age. After selecting a pension fund manager, the subscriber must also make an investing decision.
3 . In which asset classes will my money be invested in NPS?
Answer:
The following asset classes are accessible for investment through NPS:
1. Equity or E : A ‘high return-high risk’ fund that invests primarily in equities market products.
2. Corporate Debt, abbreviated C, is a’medium return-medium risk’ investment that invests primarily in fixed income products.
3. Government Securities, abbreviated G, is a ‘low return-low risk’ investment that invests solely in Government Securities.
4. Alternative Investment Funds (AIFs) — In this kind of asset class, investments are made in instruments such as CMBS, MBS, REITS, AIFs, Invlts, and so on.
5. If you are a cautious investor, you can invest your whole pension wealth in the C or G asset classes. If you desire to have equity exposure, you can allocate up to 50% of your money to group of assets ‘E’ or up to 5% to Alternative Investment Funds.
4. How do I choose a Pension Fund Manager?
Answer:
The selection of a Pension Fund Manager is required while completing the registration form. PFRDA registers and regulates all PFMs under NPS. They are required to invest Subscriber contributions in accordance with PFRDA standards and regulations. The performance of various PFMs may be found on the NPS Trust website at http://www.npstrust.org.in/return-of-nps-scheme. Returns from various NPS schemes may be useful in deciding on a PFM. You can adjust your PFM once every fiscal year in an NPS.
5. Do I have to re-open my NPS account if I change jobs or locations?
Answer:
No, you do not need to re-open your NPS account if you change jobs or locations. One of the primary aspects of NPS is portability; it may be managed from anywhere in the country, regardless of individual employment or location/geography.This means you can change your PRAN from one sector to another, such as Central Government to Corporate Sector, State Government to Central Government, and so on.Furthermore, if you are transferred for whatever reason, you can change POP-SP within the same POP or to a POP of your choice that is available to the area.
6. Is there a minimum amount of contributions required each year?
Answer:
Subscribers must contribute at least once each year. There are no limits to the amount of deposits that can be made in a calendar year.
7. Is it feasible for NPS users to add nominees to their accounts?
Answer:
Yes, Nominees can be added to an NPS account.
8. What are the many ways in which deposits to the NPS can be made?
Answer:
NPS contributions can be sent in in the form of a cheque or cash. In the case of cheque payments, however, the addition of funds to the account is made only once the cheque is realised.
9. What government body oversees the NPS?
Answer:
The Indian government established NPS, which is governed by the Pension Fund Regulatory and Development Authority (PFRDA).
10. Are there any age requirements for setting up a National Pension System (NPS) account?
Answer:
Yes, the minimum and maximum age requirements for starting an NPS account are 18 and 65, respectively.
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