National Pension Scheme (NPS)

NPS is a retirement plan offering tax benefits, flexible contributions, and varying returns, open to Indian residents aged 18-70.
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National Pension Scheme (NPS)
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4 mins
10 September 2024

The National Pension Scheme is a voluntary defined contribution pension system under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. Like PPF and EPF, the National Pension Scheme is an EEE instrument in India where the entire corpus escapes tax at maturity, and the whole pension withdrawal amount is tax-free.
With a wide range of investment options in the market, choosing which one works best for your requirements can often be challenging. Out of these, National Pension Scheme and Fixed Deposit are often considered popular and reliable investment options for different financial goals.

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What is NPS?

The NPS is a voluntary, defined contribution pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It offers a market-linked approach to saving for retirement, managed by professional fund managers.

In the NPS, individual savings are pooled into a pension fund, which is invested in a diversified portfolio of assets like government bonds, bills, corporate debentures, and shares. The returns on these investments contribute to the growth of the NPS account over time. Subscribers can contribute regularly to their NPS scheme and have the flexibility to exit the scheme before retirement or opt for superannuation.

A key feature of the NPS is that it mandates a portion of the accumulated savings to be used for purchasing an annuity, providing a lifetime pension income. Upon retirement, exit, or superannuation, at least 40% of the accumulated funds must be used to purchase an annuity, while the remaining amount can be withdrawn as a lump sum. This ensures that subscribers have a steady income stream in their retirement.

Types of NPS (National Pension Scheme) accounts

There are two types of NPS accounts, Tier I and Tier II. The former is the default account, while the latter is a voluntary addition. The table beneath clarifies the two record types exhaustively.

Particulars

NPS Tier-I Account

Status

Default

Withdrawals

Not permitted

Tax exemption

Up to Rs. 2 lakh p.a.(Under 80C and 80CCD)

Minimum NPS contribution

Rs 1,000

Maximum NPS contribution

No limit

 

Features of National Pension Scheme

Here are the specific features and benefits of investing in the National Pension Scheme:

1. Portability

NPS is a portable pension scheme, meaning that subscribers can continue their pension savings even if they change jobs.

2. Choice of investment options

NPS offers investment options in equity, corporate bonds, and government securities, which allows subscribers to choose their preferred investment mix.

3. Fund Management

NPS has a fund management system, where pension fund managers manage the investment of subscribers' contributions.

4. Systematic Investment Plan

NPS allows for systematic investment through monthly contributions, which can help subscribers to build a pension corpus over time.

5. Nomination facility

Subscribers can nominate a beneficiary, who will receive the corpus in the event of the subscriber's death.

6. Low costs

NPS is known for its low costs, which make it an attractive option for long-term pension savings.

Benefits of the National Pension Scheme

Unlock the potential benefits of the NPS scheme, offering a secure retirement avenue with tax advantages and investment flexibility. Explore features like tax deductions, market-linked returns, and portability, ensuring financial stability and growth in your golden years.

1. Tax benefits

Contributions to NPS are eligible for tax benefits under Section 80C of the Income Tax Act and additional deductions under Section 80CCD (1B).

2. Pension benefits

Upon retirement, subscribers can withdraw up to 60% of the corpus as a lump sum and use the remaining 40% to buy an annuity, which provides a regular pension income.

3. Market linked returns

NPS invests in a mix of equities, bonds, and government securities, which provides market-linked returns to subscribers.

4. Annuity options

Subscribers have the option to choose from a range of annuity plans and providers, which provides flexibility in terms of pension income.

5. Transparency

NPS provides subscribers with regular account statements, which can help them track their pension savings and investment performance.

Note: The actual benefits may vary based on the subscriber's specific circumstances and the rules in effect at the time of withdrawal.

National Pension Scheme Eligibility

Individuals meeting the specified eligibility criteria are eligible to enroll in the National Pension Scheme (NPS). The eligibility requirements are as follows:

  • Must be an Indian citizen, whether residing within the country or abroad, or a Non-Resident Indian (NRI).
  • Age should fall within the range of 18 to 70 years.
  • Must adhere to the Know Your Customer (KYC) norms outlined in the application form.
  • Should possess legal competence for contract execution in accordance with the Indian Contract Act.
  • Overseas citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are ineligible for NPS subscription.
  • As NPS is an individual pension account, it cannot be initiated on behalf of a third party.

Types of NPS (National Pension Scheme) accounts

There are two types of NPS accounts, Tier I and Tier II. The former is the default account, while the latter is a voluntary addition. The table beneath clarifies the two record types exhaustively.

Particulars

NPS Tier-I Account

Status

Default

Withdrawals

Not permitted

Tax exemption

Up to Rs. 2 lakh p.a.(Under 80C and 80CCD)

Minimum NPS contribution

Rs 1,000

Maximum NPS contribution

No limit


Additional read: Post Office Monthly Income Scheme

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How to open an NPS account

You can now open an NPS account from the comfort of your home. Opening an account online (enps.nsdl.com) is easier than ever, all you need to do is, link your account to your PAN, Aadhaar and mobile number.

To open a National Pension Scheme (NPS) account, follow these steps:

  1. Choose the type of account you want to open: Tier 1 or Tier 2. Tier 1 is a mandatory savings account, while Tier 2 is a voluntary savings account.

  2. Obtain a Permanent Retirement Account Number (PRAN) from a Point of Presence (POP) - Service Provider or a Common Service Centre (CSC).

  3. Fill out the NPS registration form, providing personal details and information about your bank account.

  4. Submit the completed form, along with required documents such as proof of identity and address, to the POP or CSC.

  5. Make an initial contribution to your NPS account through online transfer, cheque, or cash.

  6. Start contributing regularly to your NPS account as per your convenience.

It is important to keep in mind that NPS is a long-term investment plan and requires a minimum contribution to be made every year to keep the account active.

How to login to your National Pension Scheme Account for the first time?

Here are the steps to login to NPS account

Step 1: To access your NPS account, you need a 12-digit Permanent Retirement Account Number (PRAN). Obtain your PRAN by submitting the required documents either on the NSDL website or at the Point of Presence (POP) service providers.

Step 2: Navigate to the official NSDL CRA portal.

Step 3: Input your PRAN, date of birth, new password, confirm the password, and enter the captcha. Once all details are provided, click the submit button.

Step 4: A generated IPIN will be provided for logging into the NSDL portal.

Step 5: Log in to the NSDL eNPS page and select ‘Login with PRAN/IPIN’.

Step 6: On the subsequent page, utilize your PRAN and IPIN to access your NPS account.

How is NPS calculated?

Before investing in NPS, it might be worth exploring how the returns are calculated and what pension amounts you can expect at the end of your tenure. Here is the formula for calculating NPS:
A = P (1 + r/n) ^ nt
where,
P = principal
r = rate of interest
n = number of times interest has compounded
t = total tenure

National Pension Scheme (NPS) interest rate

It is important to note that there is no singular interest rate for NPS. This is because NPS is essentially market-linked, which means the interest rate for its returns depends on the performance of the assets that you invest in.

To that end, here are the four types of asset classes in which you can invest with NPS:

Asset class

Asset type

Class G

Government Bonds

Class E

Equities

Class C

Corporate Bonds

Class A

Real Estate Investment Trusts (REITs), Commercial mortgage-backed securities, and alternative investment funds.


The scheme has been in place for more than ten years and has thus far produced annualized returns of 9% to 12%. If you are unhappy with the performance of the fund, NPS also gives you the option of switching fund managers.
 

Tenure

Invest till 65 years

Interest rate

9% - 12% p.a.

Investment amount

Starting at Rs. 1,000

Maturity amount

Depends on the initial investment amount


How to use NPS withdrawal money?

NPS investments are one of the most recommended modes of investment for people looking to fulfil long-term financial goals. This is because you can only exit an NPS and withdraw the resulting amount after a period of 10 years. NPS withdrawal money can therefore be utilised for looking after your retirement, funding your children’s education or wedding or making an essential purchase such as buying a home.

Additional read: Sukanya Samriddhi Yojana Scheme

Who should invest in NPS?

The National Pension Scheme (NPS) is advantageous for individuals aiming to proactively strategise for their retirement, particularly those with a conservative risk tolerance. The prospect of a steady pension income during retirement holds significant value, especially for individuals retiring from private-sector employment.

Embracing a systematic investment approach through NPS can yield substantial benefits in the post-retirement phase. Additionally, individuals with a desire to optimize their 80C deductions can find this scheme to be a valuable consideration, particularly those employed in salaried positions.

NPS v/s Bajaj Finance FD

To gain a better perspective on how an NPS investment fares against an investment such as the Bajaj Finance Fixed Deposit, here is a brief review of their comparison:

Feature

NPS

Bajaj Finance FD

Purpose

Investment to save for retirement

Investment for a variety of short-term or long-term goals

Tenure

Can only exit after 10 years

Can choose tenure between 12 to 60 months

Nature of Investment

Market-linked

Free from market risks

Interest Rate

Depends on the performance of the asset classes in which you have invested

can go up to 8.65% p.a. for senior citizens


Thus, from the above table, it is clear that Bajaj Finance FD has several advantages over NPS, in terms of flexibility and assurance of guaranteed returns. NPS is an ideal investment for those looking to accumulate a corpus for retirement as well as to fulfil various long-term goals.

Whereas Bajaj Finance FD is a great investment for the short-term as well.

Those looking to choose between the National Pension Scheme (NPS) and Fixed Deposit need to know about the features and benefits of each of these investment options. For the most part, NPS is typically considered an essential investment option for any working professional who wishes to save up for a comfortable post-retirement life.

Conclusion

The National Pension Scheme is an excellent option for anyone looking to build a substantial retirement corpus while enjoying tax benefits. Its low-cost structure, flexibility in investment choices, and government backing make it a reliable and effective tool for retirement planning. Whether you are starting your career or nearing retirement, investing in NPS can help secure your financial future.

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Frequently Asked Questions

Can a Non-Resident Indian (NRI) join NPS?

Yes, NRIs are eligible to join NPS.

How do I join NPS?

To join NPS, obtain a 12-digit Permanent Retirement Account Number (PRAN) by submitting required documents on the NSDL website or at Point of Presence (POP) service providers.

What are the documents needed for opening an NPS account?

The subscriber registration form is needed to be filled and submitted to the POP along with proof of identity, address, and date of birth.

What is a Permanent Retirement Account Number (PRAN)?

PRAN is a 12-digit unique number assigned to NPS subscribers, serving as their permanent account number for managing contributions and withdrawals.

What are Tier-I and Tier-II accounts?

Tier-I is a mandatory pension account with restrictions on withdrawals, while Tier-II is a voluntary savings account with no such restrictions.

Can I have more than one NPS account?

No, individuals are allowed only one NPS account.

What is the minimum contribution in NPS?

The minimum contribution in NPS is Rs. 6,000 every year.

What will happen if I don't make the minimum contribution?

Failure to make the minimum contribution may lead to freezing of the NPS account.

Who manages the money invested in NPS?

PFRDA-registered Pension Fund Managers manage the money invested in NPS.

What are the investment choices available in NPS?

NPS offers a choice between Active and Auto investment options with a range of asset classes.

What are the investment options available under Active Choice?

Active Choice allows subscribers to decide the allocation of funds across various asset classes, including equities, corporate bonds, and government securities.

Can I change my investment choices?

Yes, subscribers can modify their investment choices in NPS.

Can I change my scheme and pension fund managers?

Yes, subscribers have the flexibility to change their scheme and pension fund managers.

Can I have different pension fund managers and investment options for Tier I and Tier II account?

Yes, subscribers can choose different pension fund managers and investment options for Tier I and Tier II accounts.

Can I defer withdrawing the lumpsum amount at 60?

Yes, subscribers can defer withdrawing the lump sum until the age of 70.

What happens to the money if I discontinue the scheme?

If a subscriber discontinues the scheme, the account will be frozen, and withdrawals may be restricted.

What happens if the subscriber dies before 60 years?

In the event of the subscriber's demise before 60 years, the nominee or legal heir can claim the accumulated pension wealth.

How do I withdraw the money from NPS?

Subscribers can withdraw money from NPS by submitting withdrawal forms along with necessary documents.

What are the documents to be submitted along with withdrawal forms?

Withdrawal forms must be submitted with relevant documents like:

  • PRAN card (original)
  • Attested copy of proof of identity
  • Attested copy of proof of address
  • A cancelled cheque
What is the maturity period of NPS?

The maturity period of the National Pension Scheme (NPS) is typically set at 60 years of age. However, subscribers can extend the maturity period up to 70 years, allowing for continued contributions and growth of their pension corpus.

What happens to NPS after death?

In the unfortunate event of a subscriber's death, the entire accumulated corpus in the NPS account is transferred to the nominee or legal heir. The nominee has the option to withdraw the entire corpus or purchase an annuity for a regular income.

How is NPS paid after 60 years?

After turning 60, NPS subscribers can withdraw up to 60% of the accumulated corpus as a lump sum, while the remaining 40% is used to purchase an annuity, ensuring regular pension payments throughout retirement.

What happens to 40% in NPS after death?

If an NPS subscriber passes away, the nominee can either withdraw the full NPS corpus, including the 40% allocated for an annuity, or choose to continue receiving the pension through the annuity plan.

Does wife get pension if husband dies in NPS?

Yes, if a husband passes away, the wife (nominee) is eligible to receive a pension if the annuity plan chosen by the subscriber included a provision for the spouse's pension after the subscriber's death.

What happens to NPS if I quit my job?

NPS is independent of employment, so if you quit your job, your account remains active. You can continue contributing to your NPS account and maintain it until retirement or choose to withdraw it after the lock-in period.

Does NPS give lifetime pension?

Yes, NPS provides a lifetime pension. Upon retirement, the accumulated corpus is used to buy an annuity plan, ensuring regular pension payments for the rest of your life.

What is NPS and its benefits?

NPS (National Pension System) is a government-backed retirement savings scheme that offers tax benefits, flexibility in investment options, and a regular pension after retirement. It aims to provide long-term financial security through disciplined savings.

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