NPS stands for National Pension Scheme and is a voluntary retirement scheme designed to encourage people to invest for their retirement during their employment. The scheme is for any Indian citizen who wants to save up for their retirement and is aged between 18 and 70 years old. This article covers the scheme, its features, and withdrawal rules in detail.
What is the National Pension Scheme?
The National Pension Scheme is a retirement benefit scheme launched by the Central Government to encourage retirement savings. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
In this scheme, you will have to invest a small amount regularly towards your retirement and get back a part of the investment as lumpsum during retirement. The rest is paid as a monthly regular pension throughout your lifetime.
Types of NPS Accounts
Under NPS, there are two types of accounts: Tier 1 and Tier 2. The Tier 1 account is a basic form of pension account. It is a mandatory account for all NPS subscribers and must be kept active until you turn 60. Under the Tier 1 account, only partial withdrawals are allowed. Hence, the investment in this account is locked in until you turn 60. Moreover, investment in the Tier 1 account qualifies for tax deduction.
The Tier 2 account is a voluntary savings account that can be opened only if you have a Tier 1 account. This account has no minimum or maximum investment limit. You can contribute and withdraw your investment at any time without penalty. However, there are no tax benefits for investing in this account.
Features and Benefits of NPS
The following are the features and benefits of the National Pension Scheme:
NPS Tier I Deposits
- Minimum Contribution during NPS Tier I account opening is Rs.500
- Minimum total contribution in a year of Rs.1,000
NPS Tier II Deposits
- Minimum Contribution during NPS Tier II account opening is Rs. 1,000.
- There is no limit on total contribution in a year. However, the minimum amount per contribution must be Rs.250 Tier
NPS Return
8% to 10%. The return varies based on the type of allocation investors pick. Since the NPS fund invests a portion of the funds in equity, it is exposed to market fluctuations and risks. NPS offers much higher returns than traditional tax-saving investments like the Public Provident Fund (PPF).
Maturity Period of NPS
NPS is a pension scheme that matures when the subscriber turns 60.
Tax Benefits
NPS Tier I
Investments in the NPS Tier I scheme qualify for deductions under Section 80C, with a maximum limit of Rs. 1.5 lakh and up to Rs. 50,000 under section 80CCD.
For NPS Tier I, the corpus accrued upon retirement is eligible for taxation. Upon reaching the age of 60, the subscriber can withdraw 60% of the invested amount, and this withdrawal is exempt from taxes. The remaining 40% is allocated for purchasing an annuity intended to furnish the investor with a monthly pension, and this pension is subject to taxation.
NPS Tier II
On the other hand, NPS Tier II investments do not have any tax benefits. Also, the withdrawals are taxable as per the investment holding period.
It is important to note that this tax exemption is available only if you opt for the old tax regime. No tax deductions are available under the new tax regime (announced in Budget 2023).
Flexibility
The NPS subscription is flexible. NPS subscribers can contribute to the NPS fund at any time in a financial year and change the number of subscriptions. They can choose their own investment options. They can operate their account online from anywhere and continue it even when they change their city and employment.
How Does NPS Work?
When you invest in an NPS Tier 1 account, you will have to choose your pension fund manager and opt for an investing option through which the pension fund manager will manage your investments. There are currently ten pension fund managers mandated by the PFRDA to manage your investments. You can choose any one of them to manage your investments.
You must select the fund allocation pattern once you choose the pension fund manager. You have two investment options available to you, namely active choice and auto choice.
In active choice, you can customize your portfolio across four asset classes: equity, corporate bonds, government securities, and alternate assets, each with maximum investment limits.
In the auto choice, your investments are based on your age, adjusting equity exposure higher when younger and decreasing as you age to balance risk. Options include LC 75 (aggressive, with 75% equity allocation), LC 50 (moderate, with 50% equity allocation), and LC 25 (conservative, with 25% equity allocation) portfolios, LC stands for life cycle.
Your NPS account will be opened once you choose the pension fund manager and investment choice. You can change your pension fund manager once every financial year and your investment choice (between active and auto) up to 4 times in a financial year.
After opening your NPS account, you must contribute annually until you turn 60 to keep your account active. When you turn 60, you can withdraw up to 60% of the amount as lumpsum withdrawal. The remaining 40% must be used to buy an annuity plan to get a lifelong pension.
Eligibility
You can invest in NPS if you fulfil the eligibility criteria below.
- Indian citizens, both resident and non-resident Indians, can invest in this scheme.
- Age: 18-70 years.
- Must comply with KYC (know your customer) norms.
- Overseas Citizens of India (OCI), Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) are not eligible to invest in this scheme.
How to Invest in the NPS?
You can open a NPS account both online and offline.
Offline
The following steps will help you open your NPS account offline:
- Visit your nearest Point of Presence (POP) centre branch, post office or bank branch and collect the application form
- Duly fill out the application form, sign and submit it along with Know Your Customer (KYC) documents.
- Upon making the initial investment in NPS, the POP centre will dispatch the PRAN and password.
- For offline registrations, a fee of Rs 125 is applicable.
Online
The following steps will help you open your NPS account online and KYC verification.
- Visit the eNPS website to register
- Link your mobile number, PAN number and Aadhar number to the NPS account
- For KYC verification, validate your registration using the OTP received on your registered mobile number.
- You will be issued a Permanent Retirement Account Number (PRAN) upon successful registration. PRAN can be used to login to the National Pension System account.
Documents Required for Opening NPS Account
The following are the documents required for opening an NPS account:
- Aadhaar
- A scanned copy of the PAN
- Cancelled cheque
- Photograph
In case your KYC is not complete :
- You must submit address proof documents – Driver’s license, Electricity bill, ID proof from a local MP, MLA, gazetted officer, municipal councillor, identity card issued by your employer, etc.
- PAN card
- Date of Birth Proof – Driving license, ID proof from local MP, MLA, gazetted officer, municipal councillor, Identity card issued by your employer
- Photograph
NPS Withdrawal Rules
The NPS withdrawal rules for Tier 1 account are different for different categories of citizens.
Withdrawal rules for government and corporate employees
Once you retire, the following rules will apply when you want to withdraw your NPS contribution amount.
- 60% of the amount can be withdrawn in lumpsum
- At least 40% must be used to buy an annuity plan.
- You can defer withdrawing your NPS amount until you turn 70 years old.
- You can withdraw the entire amount in lumpsum if your accumulated pension is less than Rs 5 lakhs.
Withdrawal rules for government employees taking voluntary retirement
- Invest a minimum of 80% in an annuity, and withdraw the rest 20% in lumpsum.
- You can withdraw the entire amount in lumpsum if your accumulated pension is less than Rs 2.5 lakhs.
Withdrawal rules in case of death of government and corporate employees
In the event of the death of the subscriber, the entire amount is given to the nominee.
Partial withdrawal rules
- Partial withdrawal is allowed only three times during the tenure of the scheme.
- You must maintain a minimum interval of 5 years between two withdrawals. However, in case of medical emergencies, this rule is revoked.
- You can withdraw only up to 25% of the contribution made until the withdrawal date.
- You must be an NPS subscriber for at least three years before the first withdrawal.
- A partial withdrawal is only allowed in case of children’s education, marriage expenses, house construction, or medical emergencies.
Conclusion
NPS is an excellent scheme for people considering investing in their retirement and earning tax benefits. Moreover, since the scheme invests in equities, bonds, and alternative investments, it offers diversification and gives exposure to marketable securities, helping you earn high returns.
Frequently Asked Questions (FAQs)
What is the maturity period of NPS?
The maturity period for the NPS account is 60 years. Your contributions to the NPS account must continue till you attain 60 years. However, you can partially or prematurely withdraw a certain percentage of your contributions before 60 years. Also, you have the option to extend the NPS account for another ten years (i.e., till you attain 70 years)
How much monthly pension will I get from NPS?
The monthly pension from NPS will depend on various factors, such as your asset allocation, investment duration and contribution amount.
Can a Non-Resident Indian (NRI) invest in NPS?
Yes, NRIs are eligible to open an NPS account in India.
What is the Permanent Retirement Account Number (PRAN)?
PRAN is a 12-digit unique number assigned to all NPS subscribers. You can use this number to manage your account – investments and withdrawals.
Can I have more than one NPS account?
No, you can have only one NPS Tier I and Tier II account.
What will happen if I don’t make the minimum contribution towards the NPS account?
If you fail to make the minimum contribution towards your NPS account in a year, your account may freeze.
What are the investment choices available in NPS?
NPS offer two choices for investors – active and auto choice.
Can I change my scheme and pension fund managers?
Yes, you can change your scheme and pension fund manager.
Can I have different pension fund managers and investment options for Tier I and Tier II accounts?
You can have different pension fund managers and investment options for your Tier I and Tier II accounts.
Can I defer my NPS withdrawal at 60?
Yes, you can defer your withdrawals until the age of 70.
What happens if the NPS subscriber dies before 60 years?
In the unfortunate event of the NPS subscriber’s demise, their nominee or legal heir can claim the NPS accumulated wealth.
