National Pension Scheme (NPS)

*Please note that the quotes shown will be from our partners

National Pension Scheme (NPS) is a government-sponsored pension scheme that was launched in the year 2004 By Pension Fund Regulatory and Development Authority of India (PFRDA). The National Pension Scheme was specifically designed to secure the financial future of the individuals after retirement. In the NPS scheme, the subscribers can make a regular contribution to the account during their working life and can avail the benefit of the regular annuity after retirement.  Moreover, the subscribers can make a partial withdrawal from the NPS account in case of any eventualities.

Read further to know more about the National Pension Scheme(NPS)

What is NPS?

The National Pension Scheme also known as National Pension System is opened to all the employees from the public sector, private sector, and even the unorganized sector except for those who work in the Armed Forces. In the NPS scheme, the subscribers can make a minimum contribution of Rs.6,000 in a financial year, which can be paid as lump-sum or as monthly installments of minimum Rs.500.

In the NPS scheme, the contribution of the subscribers is invested into the market-linked instruments like debt and equity and the returns depend on the performance of these investments. The current interest rate of NPS is 8-10% on the contribution made.

Any Indian citizen from the age group of 18 years to 60 years can open the National Pension Scheme account. Regulated by PFRDA, the National Pension Scheme matures at the age of 60 years and can be extended up to 70 years. The national pension scheme allows the subscribers to make partial withdrawal up to 25% of the contribution after 3 years of opening the account in specific situations like purchasing a home, sponsoring a child’s education, or for the treatment of any critical illnesses.

National Pension Scheme - NPS Benefits

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, which offers higher returns as compared to other traditional tax-saving investment options like PPF. With an interest rate of 9%-12%, this plan is best suitable for individuals who want to accumulate funds in the long-term and financially secure life after retirement.

NPS Tax Benefit

This is another NPS benefit offered to the individuals. The contribution made towards the NPS scheme up to the maximum limit of Rs.1.5 lakhs is eligible for tax exemption under Section 80C of the Income Tax Act. Moreover, in the NPS scheme, the contribution made by the employer and the employee are both applicable for the tax exemption.

Premature Withdrawals and Exit Rules

As a pension scheme, it is mandatory to invest in NPS until 60 years of age. However, partial withdrawals are allowed after 3 years from the date of opening the account. The subscribers can withdraw up to 25% of the total contribution made. Premature withdrawal is only applicable in case of specific circumstances like sponsoring a child’s education, purchasing a house, or in case of any medical emergency. The subscribers can make a withdrawal up to 3 times in the intervals of 5 years in the entire tenure. These rules are only applicable to the Tier I account and not on the Tier II accounts.

After 60 Withdrawals Rules

In the NPS scheme, the individual cannot withdraw the entire accumulated fund from the account after the retirement. In the NPS scheme, it is mandatory to keep aside at least 40% of the accumulated fund to receive a regular annuity from the PFRDA registered insurance firm. The remaining 60% of the accumulated fund is tax-free.

Equity Allocation Rules

In NPS, the investments are made into a different scheme. As per the equity allocation rule, the investors can allocate a maximum of 50% of their investment in equities. There are two options of investments are available to invest in i.e. active choice and auto choice. The active choice allows the investors to choose their fund and split the investment as per their risk appetite and suitability on the other hand, in auto choice the investment is made considering the risk profile and age of the investors.

Risk Assessment

Currently, on equity exposures of the NPS scheme a cap between the range of 75% to50% exists. For government employees, this cap is 50%. In the prescribed range, the equity portion will reduce by 2.5% every year starting from the year in which the investors will turn 50 years old. This balances the equation of risk-return for the investors that mean the invested fund is safe from the volatility of the equity market. The NPS scheme offers a higher earning potential as compared to other fixed-income schemes.

It is Voluntary

In the NPS scheme, the subscriber can contribute anytime during a financial year and can also change the amount he/she wants to invest every year.

Offers Flexibility

National Pension Scheme offers flexibility as subscribers can choose their option of investment and pension fund and see their investment grow.

It is Simple

The subscribers can open the NPS account by visiting the website of eNPS(https://enps.nsld.com/eNPS/) or at any one of the Point of Presence (POP).

It is Regulated

The NPS scheme is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). With regular monitoring and transparent investment norms, NPS offers transparency and reliability to the subscribers.

Option to Change the Fund Manager or the Scheme

This is another NPS benefit offered to the investors. The subscribers have an option to change the fund manager or the pension scheme if they are not satisfied with the performance of the scheme. This option is offered for both the accounts, Tier I and Tier II.

National Pension Scheme Returns

A national pension scheme does not have a fixed rate of interest, but the returns are based on the market performance of the funds as the investments are made in market-linked securities. The contribution made towards the NPS scheme can be invested in 4 different asset classes like equities, government bonds, corporate bonds, and alternative assets through different pension funds. The returns offered by these pension funds depend on the market performance of the stocks and bonds.

Best NPS Returns 2020

The National Pension Scheme is one of the most popular annuity products in the country. Investing in the NPS scheme not only provides an advantage to the investors over other fixed-income schemes but also offers the perk of tax exemption Under Section 80C and 80CCD of the Income Tax Act. NPS scheme comes with a lock-in period till retirement, however, it allows premature withdrawals in specific circumstances. Under the NPS scheme details, the investors are also given the advantage to allocate their investment. Investors can choose the option to invest in funds either automatically or manually. 

List of Top Performing National Pension Scheme Returns.

Scheme Name

NAV (Net Asset Value)

Returns

Birla Sun Life Pension Scheme Tier II

12.9253

 

16.38%

8.88%

-

Birla Sunlife Pension Scheme Tier I

13.4536

17.20%

10.37%

-

HDFC Pension Fund Tier I

20.1810

17.80%

10.53%

10.47%

HDFC Pension Fund Tier II

20.4761

16.93%

10.31%

10.30%

ICICI Prudential Pension Fund Scheme Tier I

27.0555

17.17%

10.38%

10.40%

ICICI Prudential Pension Fund Tier II

25.8713

16.90%

10.31%

10.34%

Kotak Pension Fund Tier I

26.9363

17.37%

10.39%

10.58%

Kotak Pension Fund Tier II

24.9800

16.33%

9.95%

10.19%

LIC Pension Fund Tier I

21.7565

18.19%

11.49%

11.49%

LIC Pension Fund-Tier II

22.1161

18.20%

12.06%

11.73%

SBI Pension Fund Tier II

27.7627

16.71%

10.18%

10.34%

SBI Pension Fund Toer I

29.2409

17.31%

10.45%

10.54%

Scheme Name

NAV (Net Asset Value)

Returns

UTI Retirement Solution Tier I

26.1936

17.12%

9.87%

10.04%

UTI Retirement Solutions  Tier II

26.9028

16.77%

10.05%

10.14%

 Disclaimer: “Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.”

National Pension Scheme Tax Benefits

The National Pension System allows tax exemption on the contribution made towards the scheme up to the maximum limit of Rs. 1.5 lakh under section 80C of the Income Tax Act. Moreover, in the NPS scheme, the contribution made by the employer and the employee are both applicable for the tax exemption.

80CCD(1)-  This is a part U/S 80elf-contribution. The maximum deduction up to 10% of the salary can be claimed for tax exemption under this section. For the taxpayers who are self-employed, this limit is 20% of the gross income.

80CCD(2)- This section covers the contribution made by the employers towards the NPS scheme. This benefit does not apply to self-employed taxpayers. The maximum amount entitled to the tax exemption is the lowest of the: a. Actual NPS contribution by employer b. 10% of Basic + Dearness Allowance c. Gross total income

You can claim any additional self contribution (up to Rs 50,000) under section 80CCD(1B) as National Pension Scheme (NPS) tax benefit.

Features of NPS

As a government-sponsored pension scheme, here we have mentioned some of the NPS scheme details and some of the salient features of the NPS:

  1. A portion of the national pension scheme goes into equities.
  2. The returns offered by National Pension Scheme are much higher as compared to the traditional tax-saving investment instrument such as PPF.
  3. NPS offers 9%-12% annualized returns.
  4. In case, the individual is dissatisfied with the performance of the fund then he/she can change the fund manager.
  5. Up to the maximum deduction of Rs. 1.5 lakh can be claimed in NPS under section 80C of the Income Tax Act.
  6. For the tier-I account, the subscribers are required to make a yearly contribution of Rs.6000 and Rs500 as a one-time contribution. For the tier-II account, the subscribers are required to make a yearly contribution of Rs.2000 and Rs.250 one-time contribution.
  7. One cannot withdrawal the entire corpus from the national pension scheme after retirement.
  8. In NPS account one can only withdraw 60% of the fund after retirement and the rest 40% of the fund is invested in the pension scheme to receive a regular pension.
  9. An individual can open an NPS account through the online or offline process.
  10. One can make a withdrawal for up to 3 times within 5 years of intervals in the entire tenure.
  11. After completion of 3 consecutive years of NPS account, one can make a withdrawal of up to 25% of the accumulated fund for a specific purpose such as medical treatment, higher education, marriage, buying a house, etc.

Fees and Applicable Charges of NPS Scheme

Intermediary Charge Head Service Charges
Bank Charges- Point of Presence  POP (Maximum Permissible Charge for each Subscription) Initial subscriber registration Rs.200
  Initial Contribution  Any subsequent contribution 0.25% of the initial contribution made by the subscriber subject to a minimum of Rs.20 and maximum of Rs.25,000
  All non-financial transactions Rs.20
  e-NPS contribution (Any subsequent contribution) 0.10% of the initial contribution made by the subscriber subject to a minimum of Rs.10 and maximum of Rs.10,000
Charges by Bank -Point of Presence (through the cancellation of units) Persistency Rs.50 per annum
Fund Manager Charges   0.01% per annum of the total accumulated amount

Eligibility Criteria of NPS Scheme

  • Any Indian citizen can open the NPS account.
  • The minimum age eligibility for opening the NPS account is 18 years whereas the maximum age limit for opening the NPS account is 65 years.
  • The applicant should be KYC compliant.
  • The applicant should bot have any pre-existing NPS account.

Types of National Pension Scheme

There are two types of accounts that NPS offers:

Tier-I Account

It is a basic pension account with limitations on withdrawal 

Before attaining 60 years of age, only 25% of the contribution can be withdrawn while the rest 75% has to be necessarily used for buying the annuity from a life insurer. An annuity is a series of payments made at fixed intervals of time. Annuity plans necessitate the insurer to pay the insured income at regular intervals until his death or till maturity of the plan. 

After attaining the age of retirement also (60 years), close to 60% contribution can be withdrawn and the rest 40% again has to be used to purchase the annuity from approved life insurers.

Tier-II Account

It is a voluntary savings option from which a person can withdraw money limitless. 

National Pension Scheme Fund Managers

The individual/organization that takes decisions regarding any portfolio of investment (mostly a mutual fund, pension fund, or insurance fund), as per the stated goals of the fund. It is necessary to opt for a fund manager while opening the account.

The money is managed by seven fund managers appointed by the PFRDA. The government employees accounts are taken care of by one of the best three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions, the money invested by others is managed by one of the six fund managers, ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.

Mentioned below are the salient features of both Tier-I and Tier-II account

Tier-I Tier-II

Tier I

Tier II

In the case of Government funds, the contribution from the employee's side is 10% basic salary + dearness allowance with the same contribution from the employer.

The contribution is Rs.1000 at the time of account opening or a minimum contribution of Rs.250 per month can also be chosen. Also, it is necessary to maintain a minimum balance of Rs. 2000 at the end of the financial year.

But in the non-government fund, the investor pays Rs.6000; with a choice of paying at least Rs. 500 per installment

-

In a Government fund, the default investment is made mostly in Corporate and Government bonds

The investment is a mix of equity, corporate bonds, government funds, FDs, liquid funds, etc.

In a non-Government fund, the default investment is in stocks, corporate bonds, government funds, FDs, liquid funds, etc.

-

Types of Funds in the National Pension Scheme in India

Class Of Fund

Invested In

Risk Average

Return Since Launch (%)

E

Index-based Stocks

Carry market risk like any large-cap equity fund

3.79%

C

Bonds issued by State Govt, PSUs and Private Firms

Going by the quality of companies, the risk would be low.

8.66%

G

Bonds issued by Central Govt.

Lacks default risk but volatility can't be avoided in long term bonds.

5.92%

Depending on how open the investor is to risk, the corpus can be divided among these three fund classes. Exposure to equity cannot be more than 50%. However if the allocation is not specified, the exposure to various classes, especially equity is decided on the basis of age. 

The above figure also tells us about the average performance of National Pension Scheme funds in different classes.

The investment mix according to the age of the investor: 

Age of the Investor

Percentage of Investment in Various Classes

Up to 35 Years

50% Equity and 50% Debt

40 Years

40% Equity and 60% Debt

45 Years

30% Equity and 70% Debt

50 Years

20% Equity and 80% Debt

55 Years

10% Equity and 90% Debt

So with increasing age, the investment corpus gets more inclined towards Debt

NPS Account for NRI

Non-Residential Indians (NRIs) can also open an NPS account and can make full use of the benefits they carry. The NPS is a retirement savings scheme launched by the government of India with an objective to secure the life of an individual financially after retirement. The eligibility criteria for NRIs who want to open an NPS account are.

  • The individual should age between 18 years -60 years.
  • The individual must complete the KYC norms.
  • OCIs and PIOs are not eligible.
  • The contribution towards the national pension scheme should come either from an NRE or NRO account.

Features and Benefits of National Pension Scheme Account for NRI

  • The investment portfolio of the NPS account is highly diversified and offers the flexibility to the investors to choose the ratio of funds that should be allotted across different investment options.
  • Investment can be made in different assets such as corporate bonds, equity, and government securities.
  • As per the risk appetite of the investor, up to 85% of the fund can be diverted to the corporate bond or equity or government securities.
  • NPS offers two types of investment options for NRIs:
    • Active Choice - the NRI investors can decide the ratio of investment and asset classes.
    • Auto Choice - Based on the age of the investor, the investment is done on behalf of the NRI investor.
  • Every subscriber is given PRAN card with 12 digits unique identification number.

How to Open an NPS Account

The Pension Fund Regulatory and Development Authority of India regulates the operations of the National Pension Scheme. PFRDA offers both online and offline process to open an NPS account. The individuals can register and obtain the subscription for the NPS scheme through the online platform of eNPS or the offline process. Let’s take a look at how to open an NPS account.

Online Process

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”.
  • 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 and 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

Offline Process

To open the NPS account manually or offline, the individual will require finding Point of The individual will require collecting the subscriber form from the nearest PoP and submitting it along with the completed KYC papers. Once the individual makes the initial investment, the point of presence will send you a Permanent Retirement Account Number (PRAN). The PRAN number and password in the sealed welcome kit will help the individual to operate the account. The offline process to open the NPS account includes one-time registration fees of Rs.125.

While this is the process of registration for the National Pension Scheme for all subscribers, the NRIs need to complete a few additional steps to complete the process.

  • Choose the status of the bank account i.e. repatriable or non- repatriable.
  • Provide the details of the NRE or NRO bank account along with a scanned copy of the passport.
  • Choose an appropriate communication address i.e either overseas address or permanent address.
  • Once the permanent retirement account number (PRAN) is allotted the applicant will need to proceed further for the authentication.
  • For the e-sign option, the applicant will need to choose the option of e-sign from the E-sign/ print & courier page.
  • Authenticate with OTP sent on the registered mobile number. Note that the number should be linked with your Aadhaar Card.
  • After Aadhaar authentication, the registration form is successfully signed.
  • It is important to note that a service charge is applicable for NRIs for E-signing the registration form.

Comparing NPS with Other Tax Saving Investment Options

Besides NPS, the other popular tax saving investment instruments available in the market U/S 80C are Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and tax-saving fixed deposits (FDs). 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

8.1% (Guaranteed)

15 years

Risk-free

FD

7%-9%(Guaranteed)

5 years

Risk-free

The NPS can earn higher returns as compared to PPF and FDs, however, it is not as tax-effective on maturity as compared to other investment options. For example, the subscribers can withdraw 60% of the accumulated fund from the NPS account on maturity. However, out of this 60%, 20% is taxable. The taxability on NPS scheme withdrawals is subject to change.

National Pension Scheme Interest Rate

NPS offers a current interest rate of 9%-12% depending on the subscribers and type of scheme.  

National Pension System offers different options of investment to the subscribers and also provides them the option to choose the fund managers as per their choice. Depending on the scheme chosen by the investors NPS offers an interest rate of up to 9%-12% as compared to other investment instruments.

NPS Withdrawals

The withdrawal of the accumulated fund from the NPS account is allowed at the age of 60. However, NPS also offers the facility of premature withdrawals in certain conditions. Let’s take a look at the withdrawal process of NPS.

Withdrawal on 60 Years

In the case of maturity of the scheme in 60 years, the subscribers can withdraw 60% of the accumulated corpus from the NPS account, whereas, the rest 40% of the accumulated amount is used to purchase the annuity. The subscribers will need to provide the withdrawal details and bank account to the aggregator to Upload the information to the CRA system for execution.

Withdrawal Before 60 Years

As a pension scheme, it is compulsory to invest in NPS until 60 years of age. However, partial withdrawals are applicable after completion of 3 years from the date of opening the account. The subscribers can withdraw up to 25% of the total contribution made. Premature withdrawal is only applicable in case of specific circumstances like sponsoring a child’s education, purchasing a house, or in case of any medical emergency. The subscribers can make a withdrawal up to 3 times in the intervals of 5 years in the entire tenure. These rules are only applicable to the Tier I account and not on the Tier II accounts.

Withdrawal on Death of the Subscribers

In case of the demise of the subscribers, the entire accumulated corpus is transferred to the beneficiary or the legal heirs. The beneficiary or the legal heir will have to contact the aggregator with the required documents like identity proof of the beneficiary, death certificate, etc. for the withdrawal of the fund.

Types of Withdrawal Forms Available

The following is the list of different forms available for different categories of withdrawal requests.

NPS Withdrawal Forms on Superannuation

Forms

Applicable For

Form 101 GS

This form can be used by government employees, who want to make withdrawal post-retirement.

Form 301

This form can be used by corporate employees and other citizens who want to make a withdrawal on superannuation

Form 501

Applicable for subscribers who are part of the Swavalamban sector and want to make a withdrawal on the superannuation

NPS Withdrawal Forms Before Superannuation

Forms

Applicable For

Form 102 GP

This form can be used by government employees, who want to make a withdrawal before retirement.

Form 302

This form can be used by corporate employees and other citizens who want to make a withdrawal before superannuation 

Form 502

Applicable for subscribers who are part of the Swavalamban sector and want to make a withdrawal before superannuation

NPS Withdrawal Form For Claimants on Demise of the Subscriber

Forms

Applicable For

Form 103 GD

This form can be used by the beneficiary/legal heir of the government employees, who was an NPS subscriber. The nominee can fill the form to claim the accumulated amount in the account of the subscriber.

Form 303

This form can be used by the beneficiary/legal heir of the corporate employees and other citizens who were an NPS subscriber. The nominee can fill the form to claim the accumulated amount in the account of the subscriber.

Form 503

Applicable for the beneficiary/legal heir of subscribers who were part of the Swavalamban sector. The nominee can fill the form to claim the accumulated amount in the account of the subscriber.

National Pension Scheme FAQ's

Q: Can I have two NPS accounts?

No, you cannot open more than one NPS accounts. Moreover, there is no need to open another NPS account because NPS can be ported across locations and sectors.

Q: Who is eligible to take the National Pension Scheme?

Any Indian citizen who falls in the age group of 18 years and 60 years is eligible to take the National Pension Scheme as part of his/her retirement planning. However, the only condition that he/she needs to comply with is to know his/her to KYC norms. 

Q: What is the lock-in period for the National Pension Scheme (NPS)?

Up to 60 years of the insured. However, an insured can also opt for a premature exit from this scheme after completing at least 10 years with it, but in this case, 80% of the corpus is annuitized. The insured can withdraw only the remaining 20% as a lump sum. Here, both lump sum and annuity are taxable. In addition to this, an insured can also make a withdrawal of up to 25% of the corpus on some special grounds and these withdrawals will be free of tax.

Q: How much can I invest in NPS?

Earlier it was Rs.1 Lakh under section 80CCD and in the budget of the year 2015, it was increased to Rs.1.5 lakh.

Q: How can I join the National Pension Scheme?

There are four steps to join NPS, these steps are:

  • The prerequisite to join NPS is Permanent Retirement Account Number (PRAN). One can get the forms for PRAN from any of the presence service providers (POP-SP) under the National Pension Scheme.
  • Then the details of the applicant, preferred scheme details, and details of the bank have to be filled in the application form. ID and address proof, photograph for the KYC should be attached in the application form.
  • An applicant should submit this form with all the required documents at the office of the POPSP. The PRAN is generated and issued to the address of the applicant soon after verification and processing of this form.
  • When an applicant is submitting the form, he/she has to contribute at least Rs.500 to the POP-SP. For the same, the applicant has to fill a contribution slip (NCIS) with the particulars of the payment instrument with the payment.

Q: Can I transfer my NPS account?

Since you cannot have two NPS accounts, so if you change job or switch employer, you have to transfer your NPS account from your old employer to new.

Q: What are the tax benefits of the national pension scheme?

Your contribution towards National Pension Scheme makes you eligible to get tax benefits under section 80CCD (1) of the Income Tax Act. The ceiling on the tax deduction in section 80C and 80CCE is Rs.1.5 Lakh. The tax exemption for the contribution of the employer comes under section 80CCD (2). In addition to this, you can claim an additional tax deduction of maximum Rs.50, 000 in section 80CCD (1B) that is added over the permissible limit of Rs.1.5 Lakh. If you are self-employed, then also you can contribute 10% of your total gross earnings under section 80CCD (1) in the National Pension Scheme.

Q: How can I pay NPS online?

Follow the below steps to pay NPS online:

  • Enter the PRAN number.
  • Select the type of account.
  • Select the category of the account.
  • Enter the payment amount.
  • Click ‘Submit’.
  • Check the online reference number or PRAN, email id, mobile number, and email id.
  • If all the information is correct, click ‘Pay Now’.

Q: Which is the best National Pension Scheme?

Below mentioned is the list of eight top pension fund managers:

  1. HDFC Pension Fund
  2. Birla Sun Life Pension Scheme
  3. ICICI Prudential Fund Scheme
  4. LIC Pension Fund
  5. Kotak Pension Fund
  6. National Pension Scheme SBI
  7. Reliance Capital Pension Fund
  8. UTI Retirement Solution
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
Search
GET ARTICLE ON EMAIL