National Pension Scheme (NPS) – How to Open NPS Account?

National Pension Scheme or NPS is a voluntary contribution-based retirement benefits scheme introduced by the Government of India in January 2004. The NPS is available to all citizens of India, including the unorganized sector, and it aims to provide a regular and secured pension income to the retired individuals. Every person registered under the scheme has to open an NPS account where he/she has to contribute regularly during their employment years. 

The National Pension system is regulated by the Pension Fund Regulatory and Development Authority or PFRDA, which allows professional fund managers to invest this corpus in various financial instruments. 

How Does NPS Work?

Under the NPS, individual savings are pooled into a pension fund which are invested by PFRDA-regulated professional fund managers as per the approved investment guidelines into diversified portfolios comprising equities, government bonds, treasury-bills, corporate debentures and shares. 

The account holder can choose how much they want to contribute towards the pension scheme subject to terms and conditions and also select the fund manager to manage their investments. 

Upon retirement, the account holder can withdraw a part of the accumulated corpus as a lump sum and use the remaining corpus to purchase an annuity plan to receive a regular income stream for the rest of their life. The annuity can be purchased from any of the IRDA-regulated insurance companies. 

If an NPS account holder, unfortunately, passes away before the age of 60 years, the entire accumulated sum is paid to his/her nominee or legal heir.

Top Features of an NPS Account

Here are some of the features of an NPS account which you should be aware of:

1. Flexibility

You will have the option to change your fund manager, point of presence and investment pattern which if done wisely will maximise your return on investment. Account holders can invest any amount of money at any time in the account.

2. Withdrawal

You can withdraw up to 60% of your NPS corpus upon reaching retirement age tax-free, while the remaining 40% need to be converted to an annuity plan. You can also withdraw up to 25% of your Tier I funds after a minimum of 3 years for specific reasons like higher education, home purchase, marriage or medical emergency.

3. Cost Effective

NPS has a low cost of investment

4. Superannuation Fund Transfer

NPS account owners can transfer their superannuation fund without any tax implications

5. Transparency

NPS funds are closely regulated by the PFRDA which monitors closely if the guidelines are being followed properly. 

Also, your PRAN or NPS account will remain unchanged regardless of a change in employment, city or state.

National Pension Scheme (NPS) Interest Rate

The current NPS interest rate could be in the range of 9% to 12% depending on the type of the scheme, its underlying asset class and the subscriber. Investors need to invest till they reach the retirement age of 60 years and minimum investments begin at ₹250. 

How to Open an NPS Account Online? 

How to Open an NPS Account Offline? 

• Step 1: Collect offline form from nearest KFINTECH or NSDL Point of Presence Service Providers. You can also download the form from here.
• Step 2: Fill the form with all the necessary details and submit it along with required documents like PAN, Aadhaar, Passport, etc.
• Step 3: Pay required fees up to ₹400
• Step 4: Upon successful submission and processing, you will receive a PRAN and a password to operate your account online from the POP

NPS Eligibility Criteria

• The minimum age limit to avail of the benefit is 18 years, and the maximum age for entry is 70 years
• Must be a resident or non resident Indian citizen
• The applicant must be KYC compliant
• Individuals should not have a pre-existing NPS account

NPS Documents Required

You need the following documents to open an NPS account:

• Aadhaar card
• Voter ID card
• Recent photo
• Active bank account details
• PAN or NREGA card

Types of NPS Accounts

1. Tier-I account

A Tier-I National Pension Scheme account is a basic account with a restrictions on withdrawal. For example, if you have not crossed 60 years of age, withdrawal of only 25% of the contribution is allowed. However, the other 75% must only be for buying the annuity from a life insurer.

2. Tier-II account

This is a voluntary savings option that does not have any limit on money withdrawal.  One can only open it if they already have a Tier-I account. There is no minimum yearly contribution requirement in the case of an NPS Tier-II account. There are no lock-in periods for NPS Tier II accounts.  

How is NPS Calculated – National Pension Scheme Calculator

To calculate your NPS returns, you can use the NPS calculator for instant and accurate results. Simply enter your current age, your monthly or annual contributions and the expected return on investment, and the calculator would show you the potential returns in seconds! 

What are the Conditions for Different Withdrawal Options Available to NPS Holders?

There are different withdrawal options available to the government pension fund account holders. However, for each withdrawal option, there are also individual conditions that one must satisfy. It includes:

1. NPS Withdrawal from a Tier-I account 

The following are the rules for different withdrawal options:

1. At Retirement

1. Holders must use 40% of their retirement corpus to buy an annuity 
2. The maximum period for deferring the annuity purchase extends up to three years only
3. Around 60% of the corpus amount can be withdrawn as a lump sum. The amount will be exempted under law
4. An NPS holder can defer withdrawing their lump sum amount until the age of 70 or up to 10 years after their retirement, whichever comes early
5. There are ten instalments available to holders to withdraw their lump sum amount
6. If the retirement corpus of an NPS holder is less than ₹2 lakh, he/she can withdraw the total amount. 

2. Premature Exit

1. A premature exit option is only available to NPS holders after ten years have passed from the account opening date
2. One can withdraw up to 20% of the corpus, while the remaining 80% must be used in annuity purchases

3. Partial Withdrawal

1. There is a maximum limit up to which one can partially withdraw funds from an NPS account, which amounts to 25% of the total contribution
2. No NPS holder can withdraw partially before the completion of three years after opening the account
3. A holder can make a partial withdrawal from an NPS account up to three times only
4. There are specific conditions only under which an account holder can withdraw partially:
   • Child’s marriage
   • Completion of higher education
   • Providing medical expense
   • Purchase or construction of a residential house
   • If any amount is required for starting own business venture

2. NPS Withdrawal from a Tier-II Account

There is no restriction on withdrawal from the Tier-II account.

3. Withdrawal on Death 

On the unfortunate demise of the holder, the nominee will get an outstanding amount of the corpus. Also, this amount gets full exemption under the law. 

Benefits of Government Pension Scheme Account

Here are some of the benefits of having a pension fund scheme account:

1. Regulatory Assurance

The PFRDA, the statutory body, regulates the NPS. It ensures transparent governance norms, financial reporting, and safeguards the interest of the investors. 

2. Flexibility

The National Payment System offers flexibility to its subscribers. They can choose the pension funds and fund managers as per their risk tolerance. If investors are not happy with the returns of one fund and the performance of fund managers, they can switch to another fund.

3. Easy Account Opening and Accessibility

NPS accounts can be opened online anytime and from anywhere. This has helped in avoiding the hassles of physical documentation. Individuals can also access their accounts online and make deposits and withdrawals online. 

4. Tax Benefits

Investments in NPS Tier I accounts qualify for tax deduction benefits up to ₹1.5 lakh under Section 80C and ₹50,000 under section 80CCBD (1B) of the Income Tax Act. Also, for tier-1 accounts, the entire corpus withdrawn at maturity is tax-exempt.

5. Stable Returns

Fund managers who are in charge of these funds are bound by PFRDA regulations. They cannot invest in very risky assets. The returns from these funds usually hover between 9% and 12%, which could be higher than other tax-saving investment options like PPF. 

6. Economical

It is an affordable investment plan, which is why many investors choose this to meet their retirement goals while maximising tax-saving along the way. 

Also Read

10 Best National Pension Schemes (NPS) in India in April 2023

How to Open an NPS Account Online and Offline?

What are the Tax Benefits Available under NPS?

Tax benefits under the National Pension Scheme are available for individuals, employees, government employees, and companies. So, for convenience, we have divided them into different sections:

1. Tax Benefits for Individuals

• A tax benefit of 20% of the gross income is available to self-employed individuals. However, the amount cannot cross the limit of ₹1.5 lakh as per Section 80C.
• There’s also an additional tax benefit of ₹50,000 available to NPS Tier-I account holders under Section 80CCD(1B)

2. Tax Benefits for Employees

• Employees can claim a tax benefit of 10% of their salary or gross income. Here, salary includes both basic and DA. However, this limit should not exceed ₹1.5 lakh as per Section 80CCD(1). 
• A deduction of ₹50,000 is also available to employees under Section 80CCD(1B).  

3. Tax Benefits for Government Employees

• Central Government employees also get NPS tax benefits under which they can claim around 14% of their income as deductions u/s 80CCD(2)
• If government employees contribute to NPS, they can also avail an additional tax deduction of ₹50,000. 

4. Tax Benefits for Companies

Employer’s contribution to the government National Pension Scheme (up to 10% of basic salary + DA) is deductible from the taxable income as a business expense. 

5. Other Tax Benefits

• In case an account holder makes a partial withdrawal, a claim of 25% of the subscription amount is available for a tax exemption
• The amount subscribers use to avail of annuity is free of tax. However, the income one gains on it is taxable under the law.
• There is no tax payable on 60% of the corpus value. Apart from this, if the remaining 40% is used to buy an annuity, the total maturity amount becomes tax-free. But still, your income from the annuity will be taxable

Also Read

Tax Benefits Under National Pension Scheme (NPS) Explained

Who Are NPS Fund Managers and What Are Their Duties

Risk Factors Associated with NPS

You should be aware of the drawbacks of NPS before opting for it. The following are some of the risk factors associated with NPS that you should consider:

1. Unable to Beat Inflation

An NPS account holder is forced to buy a life annuity from a life insurance company. Annuity returns may be insufficient to beat inflation.  

2. Lock-in Period

NPS accounts have a longer lock-in period as compared to other investment instruments. One can only withdraw the corpus completely after reaching the age of 60 years.

3. Premature Withdrawal

While the lock-in period is fixed, NPS offers 3 options for premature withdrawal. They are as follows:

• If you wish to withdraw the corpus before the age of 60 years, you can withdraw 80% of the amount only if the corpus exceeds ₹1 lakh.
• In case of the sudden demise of the account holder, the entire amount will be transferred to the legal heir or nominee and will be tax-free.
• At the age of 60, you can withdraw only 60% of the entire corpus, the remaining 40% must be invested in a life annuity. You can withdraw 60% as a lump sum amount or in instalments up to the age of 70 years. However, if the entire amount is less than ₹2 lakh, you are allowed to withdraw the whole amount. 

Comparison of NPS with Other Tax-saving Schemes

The other tax-saving schemes available in the market are PPF or Public provident fund, ELSS (Equity-linked saving schemes), and tax-saving fixed deposits. So, to understand how beneficial NPS can be over other options, a comparison is made in the following table:

Who Should Consider Investing in NPS?

If you want to accumulate funds for retirement and have a steady flow of income, you should consider investing in a government pension scheme. Any citizen within the age group of 18 to 60 years is eligible for investing in government pension schemes such as the National Pension Scheme.  

Things to Consider Before Investing in NPS

1. Investment Goals

NPS mainly aims at securing a decent post-retirement life. Investors who want a stable and regular income after their employment years might go for this investment. Individuals who have long-term financial objectives, such as building a retirement home, and funding children’s higher education, can consider opting for this scheme.

2. Risk Appetite

The cap of equity exposure in the case of NPS can range anywhere between 50% and 75%. The higher the equity allocation, the higher the potential returns and financial risk. Hence, it is vital for investors to consider their risk tolerance level before making a decision regarding asset allocation.  

How to Select the Right Pension Scheme Fund?

You should consider the following pointers before opting for the right pension scheme fund:

• There are multiple savings instruments to invest in. That said, you should consider investing in a diversified portfolio for security and stability. Also, you should not think that you will be able to live the rest of your life on the amount that you will withdraw from your PPF or EPF account. The funds will not be enough if there is no active source of income.
• You should be careful that your retirement age is in accordance with the vesting age. If you plan to retire early, you should go for plans with an early vesting age. On the other hand, if you plan to retire late, you must go for a plan that has a late vesting age.
• The sum assured and the withdrawal amount is what you should primarily care about. There are many plans which won’t let you withdraw the entire sum assured upon maturity. Read the terms and conditions carefully and try to invest in plans which provide 100% withdrawal upon maturity or upon the sudden demise of the policyholder.
• A quality pension scheme will cover you and your spouse as well. Living a financially independent life while there is no active source of income is what you should consider while looking out for each other.

Role of National Pension Scheme Fund Managers

Fund managers play a crucial role in managing the National Pension Scheme Fund. They will allocate the assets to diversify the portfolio so that you get a stable return. They will also periodically review the portfolio to see if the assets are performing well and make changes accordingly if required. The expertise of a fund manager indicates how your fund is going to perform.

NPS Customer Care Numbers

Telephone: 022 2499 3499
Toll Free for Registered Subscribers with PRAN: 1800 222 080

Final Word

The NPS scheme could play a key role in offering financial security after retirement. The additional tax benefits, decent returns potential and strict monitoring of the working of these funds could make it a good investment option for you. You can easily open an National Pension Scheme account online or offline and start securing your retirement years starting today! However, you may want to diversify your retirement investments beyond PPF, EPF and NPS to meet your post-retirement financial needs.

That said, if you’re looking for another tax-saving investment that could offer you high returns with low lock-ins, you may consider Navi ELSS Tax Saver Nifty 50 Index Fund starting at just ₹500. 

Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully. 

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