The National Pension Scheme (NPS) is a long-term retirement savings scheme initiated by the Government of India. It is designed to provide financial security to individuals during their post-retirement years. NPS offers a flexible and systematic way to accumulate a retirement corpus, allowing contributors to make regular contributions towards their pension fund. It is open to all Indian citizens, both residents and NRIs.
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The National Pension Scheme (NPS) is a voluntary, long-term retirement savings scheme designed to enable systematic savings for individuals, particularly for retirement. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India.
Under the NPS, individuals can contribute regularly towards their pension account during their working years. Upon retirement or reaching a specified age, they can withdraw a portion of the corpus as a lump sum, while the remaining amount is utilized to provide a regular pension or annuity.
Check Out: Pension Plans for NRI
The following are the benefits of the National Pension Scheme:
Returns/Interest: A portion of the contribution made towards the NPS scheme is invested in equities, providing higher returns compared to traditional tax-saving options like PPF. With interest rates ranging from 9% to 12%, NPS is ideal for individuals aiming to build a robust financial foundation for their retirement.
NPS Tax Benefit: Contributions made to the NPS scheme, up to the maximum limit of Rs. 1.5 lakhs, are eligible for tax exemption under Section 80C of the Income Tax Act. Both employer and employee contributions qualify for this benefit.
Premature Withdrawals and Exit Rules: While participation in the NPS is mandatory until the age of 60, partial withdrawals are allowed after 3 years. Subscribers can withdraw up to 25% of their total contribution for specific purposes like education, home purchase, or medical emergencies. This can be done three times in five-year intervals, applicable to Tier I accounts only.
Premature Withdrawal: Upon retirement, individuals cannot withdraw the entire accumulated fund. They must set aside at least 40% to receive a regular annuity from a PFRDA registered insurance firm. The remaining 60% is tax-free.
Equity Allocation: NPS offers flexibility in investment choices. Investors can allocate a maximum of 50% of their funds in equities. They can opt for 'active choice' to customize their fund distribution based on risk appetite, or 'auto choice' for an allocation based on age and risk profile.
Risk Assessment: The NPS scheme maintains a cap between 75% to 50% for equity exposure. For government employees, this cap is fixed at 50%. This allocation decreases by 2.5% annually from the year the investor turns 50, mitigating market volatility and providing a balanced risk-return profile.
Voluntary Contribution: Subscribers can contribute to the NPS scheme at any point during the financial year and adjust their investment amount annually.
Flexibility: NPS allows subscribers to select their investment option and pension fund, enabling them to witness their investment grow according to their preferences.
Simplicity: Opening an NPS account is hassle-free. Subscribers can do so by visiting the eNPS website or at any Point of Presence (POP).
Regulation: The NPS scheme is overseen by the Pension Fund Regulatory and Development Authority of India (PFRDA). Through consistent monitoring and transparent investment norms, NPS provides reliability and transparency to all subscribers, including NRIs/OCIs/PIOs.
Expected Return on Investment
Percentage of Corpus Allocated for Pension
Expected Return from Pension
The NPS, a government-sponsored pension scheme, offers the following key features:
Flexibility: Subscribers can choose their own investment options and pension fund, and they can change their choices at any time.
Portability: Subscribers can carry their NPS account with them even if they change jobs or cities.
Low cost: The NPS is one of the most cost-effective pension schemes in India.
Tax benefits: Contributions to the NPS are eligible for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act, 1961.
Minimum contribution: The minimum annual contribution to the NPS is INR 1,000.
Tier I and Tier II accounts: Subscribers can open two types of NPS accounts: Tier I and Tier II. Tier I accounts are locked-in until retirement, while Tier II accounts offer more flexibility.
Annuity options: At retirement, subscribers can withdraw up to 60% of their corpus as a lump sum and use the remaining 40% to purchase an annuity plan. Annuity plans provide subscribers with a regular pension income.
Any Indian citizen can open the NPS account.
You must be between 18 and 60 years old at the time of submitting your application.
The applicant should be KYC compliant.
If you are an NRI, you must also meet the following additional criteria:
You must have a valid passport.
You must have a valid bank account (Non-Resident External Account or Non-resident ordinary account).
OCIs and PIOs are also eligible for this scheme
Read Here: Pros and Cons of NPS
Employees can claim a tax deduction of up to 10% of their salary (basic + DA) under section 80CCD(1) of the Income Tax Act, 1961, for their contributions to NPS. This deduction is over and above the Rs. 1.5 lakh limit under section 80CCE.
Employees can also claim an additional tax deduction of up to Rs. 50,000 under section 80CCD(1B) of the Income Tax Act, 1961. This deduction is also over and above the Rs. 1.5 lakh limit under section 80CCE.
Employers can also contribute to their employees' NPS accounts, and these contributions are exempt from tax for the employer.
Self-employed individuals can claim a tax deduction of up to 20% of their gross income under section 80CCD(1) of the Income Tax Act, 1961, for their contributions to NPS. This deduction is subject to the overall limit of Rs. 1.5 lakh under section 80CCE.
Self-employed individuals can also claim an additional tax deduction of up to Rs. 50,000 under section 80CCD(1B) of the Income Tax Act, 1961. This deduction is also over and above the Rs. 1.5 lakh limit under section 80CCE.
There are two types of NPS accounts:
Tier I NPS account: This is a mandatory retirement account. You can withdraw money from your Tier I NPS account only after you reach the age of 60. However, you can make partial withdrawals after the age of 50.
Tier II NPS account: This is a voluntary savings account. You can withdraw money from your Tier II NPS account at any time.
|NPS Tier I||NPS Tier II|
|Eligibility||Indian citizen between 18 & 65 years of age||Members of Tier I only|
|Lock-in||Till the age of 60 years||NIL|
|Minimum number of contributions in the year||1||NIL, you can choose not to make any contribution in a year|
|Minimum contribution for account opening||Rs 500||Rs 1,000|
|The minimum amount for subsequent contribution||Rs 500||Rs 250|
|Available asset classes||-Equity (E): Predominant investment in Equity market instruments. Maximum 75%
-Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments
-Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments
-Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc.
|Tax benefits on the contribution||-For Tier-I investments, tax is deductible within the total ceiling of 1.5 lakh under Section 80CCD (1)
-Allowed up to Rs.50,000 as deductions towards Tier-I contributions under 80CCD 1(B)
|No tax benefit|
Non-Residential Indians can also open a National Pension Scheme account and can make full use of the benefits they carry.
The Pension Fund Regulatory and Development Authority of India offers both an online and offline process to open an NPS account. Let's take a look at how to open an NPS account.
An individual can now open an NPS account in a simple and hassle-free way. To open an NPS account online, it is important to link the account to the PAN, Aadhaar, and mobile number. Let’s take a look at the steps to open the NPS account online:
Go to the website of enps.nsdl.com.
Choose the type of subscribers from the available option' corporate subscriber' and 'individual subscriber'.
Choose the appropriate residential status. The option includes “ India Citizens” and “NRI or OCI or PIO”.
Select for either Tier I account type or both the accounts as it is mandatory for long-term savings.
Enter the PAN details and choose a suitable PoP or bank.
Click on the registration and choose the option of ‘register with Aadhaar’.
Enter the Aadhaar number and click on the option of ‘generate OTP (One Time Password)’.
An OTP will be sent to the registered mobile number.
Enter the OTP along with personal information, bank details, and nomination details.
Once the application form is successfully submitted, the Permanent Retirement Allotment Number (PRAN) will be allotted to the applicant.
Once the individual submits the e-signature and photograph an OTP will be sent to the registered mobile number.
Enter the OTP to verify the signature and make payment.
Once directed to the payment gateway, process to make payment of the required charges via net banking.
Once the payment is done successfully, the permanent retirement account number will be generated
To manually open an NPS account offline, follow these steps:
Find the nearest Point of Presence (PoP).
Collect the subscriber form and complete KYC papers from the PoP.
Submit the filled form and KYC documents.
Make the initial investment.
PoP will send a Permanent Retirement Account Number (PRAN) in a welcome kit.
PRAN and password in the kit will be used to operate the account.
Registration fee is Rs.125.
For NRIs/OCIs/PIOs, additional steps are needed:
Choose bank account status (repatriable or non-repatriable).
Provide NRE or NRO bank account details and passport scan.
Select communication address (overseas or permanent).
After PRAN is allotted, proceed for authentication.
Choose the e-sign option on E-sign/ print & courier page.
Authenticate with OTP sent to linked Aadhaar Card mobile number.
Once Aadhaar authentication is done, registration is complete.
Note: Service charge applies for NRIs for E-signing.
Let’s take a look at the comparison between NPS and other tax-saving instruments.
|Investment||Interest||Lock-in Period||Risk Profile|
|NPS||9%-12%||Till retirement||Market-related risk|
|ELSS||12%-15%||3 years||Market-related risk|
|PPF||7.1% (Guaranteed)||15 years||Risk-free|
The taxability on NPS scheme withdrawals is subject to change.
Check Here: NRI Tax in US
At age 60, subscribers can withdraw 60% of NPS corpus.
Remaining 40% used for annuity purchase.
Provide withdrawal details to the aggregator for execution.
Mandatory NPS investment until age 60.
Partial withdrawals allowed after 3 years.
Up to 25% of total contributions can be withdrawn.
Specific circumstances under which you can withdraw: education, house purchase, medical emergency.
Three withdrawals every 5 years; applies to Tier I only.
Entire corpus transferred to beneficiary/legal heirs.
Required documents: beneficiary's ID, death certificate, etc.
The following is the list of different forms available for different categories of withdrawal requests.
|Form 101 GS||For government retirees' withdrawals.|
|Form 301||For corporate and public withdrawals post superannuation.|
|Form 501||Swavalamban sector withdrawals on superannuation.|
|Form 102 GP||Used by government employees, who want to make a withdrawal before retirement.|
|Form 302||Used by corporate employees and other citizens who want to make a withdrawal before superannuation.|
|Form 502||Subscribers who are part of the Swavalamban sector.|
|Form 103 GD||For NPS subscriber government employees' beneficiary/heir to claim accumulated amount.|
|Form 303||For NPS subscriber corporate employees and citizens' beneficiary/heir to claim accumulated amount.|
|Form 503||For Swavalamban sector subscriber's beneficiary/heir to claim accumulated amount.|
Note: The nominee can fill the form to claim the accumulated amount in the account of the subscriber.
*All savings are provided by the insurer as per the IRDAI approved insurance
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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