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.
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.
Here are some of the features of an NPS account which you should be aware of:
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.
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.
NPS has a low cost of investment
NPS account owners can transfer their superannuation fund without any tax implications
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.
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.
NPS accounts can be opened online and offline. Let’s see how this can be done.
Enrol for NPS by clicking on ‘Apply Now’ option under NPS (National Pension System)
Choose a Central Recordkeeping Agency between K-Fin Technologies Private Limited or NSDL e-governance infrastructure LTD to open the account
Fill the mandatory fields in the online form
Save Acknowledgement Id for your registration. You can complete registration within 15 days
Acknowledgement Id for your registration (account opening) will be generated. There will be provision to complete the registration (account opening form) later, but within 15 days, based on acknowledgement number search
Complete KYC verification
Share details like bank details, scheme details, nominee details, etc.
Upload photograph, specimen signature, cancelled cheque or bank statement or passbook copy and PAN copy
Make initial contribution of at least ₹500
You will be directed to online payment platform wherein you will complete the payment through net banking or payment gateway
On successful payment, 12-digit PRAN will be allotted to you and communicated via registered email and SMS
Complete online e-sign or OTP based confirmation once registration process is completed
You need the following documents to open an NPS 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.
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.
|Parameters||NPS Tier-I Account||NPS Tier-II Account|
|Minimum Account Opening Balance||₹500||₹1,000|
|Minimum Annual Contribution||₹1000 (Above this amount, the account holder has absolute discretion about the amount)||No minimum annual contribution is required|
|Tax Benefits on Contribution||Tax deduction benefit up to ₹1.5 lakh under Section 80CCD(1). An additional contribution of up to ₹50,000 is also tax free under section 80CCD (1B)||No tax deduction benefit|
|Withdrawal||Only on maturity (Early withdrawals are allowed only under special circumstances). 60% can be withdrawn lump sum while 40% needs to be converted to an annuity plan||There is no restriction on withdrawal|
|Tax Applicable on Withdrawal||The entire corpus amount withdrawn upon maturity is tax-exempt||Any amount taken out at maturity is added to the taxable income and taxed accordingly|
|Maximum Investment Limit||No limit||No limit|
|Transfer Between NPS Accounts||Funds can be transferred from Tier II to Tier I||Funds cannot be transferred|
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!
Investemt Per month
Expected return (P.a)
Min. annuity investment
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:
The following are the rules for different withdrawal options:
There is no restriction on withdrawal from the Tier-II account.
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.
Here are some of the benefits of having a pension fund scheme account:
The PFRDA, the statutory body, regulates the NPS. It ensures transparent governance norms, financial reporting, and safeguards the interest of the investors.
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.
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.
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.
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.
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.
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:
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.
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:
An NPS account holder is forced to buy a life annuity from a life insurance company. Annuity returns may be insufficient to beat inflation.
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.
While the lock-in period is fixed, NPS offers 3 options for premature withdrawal. They are as follows:
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:
|Interest||9% to 12%*||12% to 15%||Guaranteed 7.1%||Guaranteed 5.5% to 7.5%|
|Lock-in period||Up to retirement||3 years||15 years||5 years|
|Risk profile||Market risk||Market risk||No risk||No risk|
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.
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.
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.
You should consider the following pointers before opting for the right pension scheme fund:
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.
Telephone: 022 2499 3499
Toll Free for Registered Subscribers with PRAN: 1800 222 080
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.
NPS is a Central Government Scheme; there are strict guidelines of PFRDA that every pension fund manager has to adhere to. Returns might be low when there is market turbulence, but the safety of these funds has never been in doubt.
One of the biggest drawbacks of this scheme is that it has restrictions on withdrawals before maturity. Only a limited amount can be withdrawn and that too in exceptional cases.
Yes, NRIs can open an NPS account subject to the terms and conditions of RBI and other regulatory bodies. They have to go through a separate application process and submit a specific list of documents required to open the account.
Apart from the deductions available on the investment amount, investors also get exemptions on the maturity amount. This tax treatment is referred to as EEE or exempt-exempt-exempt. However, this applies to only specific financial instruments.
Different sections offer different maximum deductions as per applicability:
a) Under Section 80CCD(1): 10% of subscribers’ salary having a limit of up to Rs. 1.5 lakh
b) Under Section 80CCD(1B): Up to Rs. 50,000
c) Under Section 80CCD(2): 10% of subscriber’s salary
The National Pension Scheme is monitored and regulated by the Pension Fund Regulatory and Development Authority of India established under PFRDA Act, 2013.
The following are some popular pension schemes for government employees:
– National Pension Scheme
– Aditya Birla Sunlife Empower Pension Plan
– Bajaj Life-Long Goal Pension Scheme
– Exide Life Golden years Retirement Plan
– HDFC Life Click 2 Retire
– HDFC Life Personal Pension Plus
– LIC New Jeevan Akshay Pension Scheme
– Reliance Immediate Annuity Plan
– SBI Life Saral Pension Plan
– TATA AIA Life Easy Retire
The National Provident Fund is a Defined Contribution Fund. Both the employee and the employer make similar contributions towards the individual account upon which the interest is accrued. The accumulated corpus can be withdrawn upon maturity at the retirement age of 60 years by the employee. Any Indian citizen within the age bracket of 18 to 60 years is eligible for the National Provident Fund.
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