Everything to know about National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a voluntary, contribution-based retirement savings scheme launched by the Government of India in 2004. The scheme was introduced to provide a sustainable and long-term solution for the retirement needs of citizens of India.

Under the NPS, individuals can contribute regularly towards their retirement and build a corpus over time. The scheme is managed by the Pension Fund Regulatory and Development Authority (PFRDA), which regulates and supervises the functioning of the fund managers and other intermediaries associated with the scheme.

Features of NPS

The NPS is a defined contribution-based scheme, where the amount of pension one receives after retirement depends on the amount of contribution made over the years. The scheme is open to all Indian citizens aged between 18 and 65 years. The scheme also offers tax benefits under Section 80C and Section 80CCD of the Income Tax Act.

There are two types of accounts under the NPS – Tier I and Tier II. Tier I is a mandatory account that is meant for retirement planning and has restrictions on withdrawal. On the other hand, Tier II is a voluntary account that offers flexibility in terms of withdrawal and is primarily meant for short-term savings goals.

The features of NPS include:

1. Flexibility – NPS offers flexibility in terms of contribution amounts and frequency, investment choices, and retirement benefits. Investors can choose their own investment options and fund managers, and switch between them as per their preferences.
2. Tax Benefits – NPS provides tax benefits under Section 80C and Section 80CCD of the Income Tax Act. Additionally, it also offers tax benefits on the maturity amount, which is exempted up to 60% of the corpus.
3. Portable – NPS is a portable retirement savings scheme, which means that an investor can continue to contribute to it even if they switch jobs or move to a different city.
4. Low Cost – NPS has a low cost structure compared to other retirement savings options. The scheme charges a maximum of 0.25% as fund management fees, making it one of the most cost-effective options for retirement planning.
5. Safety and Security – NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures that the scheme is safe and secure. The fund managers are required to invest the corpus in a diversified portfolio to minimize risk and maximize returns.
6. Multiple Exit Options – NPS offers multiple exit options to the investors, including the option to withdraw a lump sum amount or to receive a regular pension after retirement. This provides investors with flexibility in planning their retirement and managing their finances.

Overall, the National Pension Scheme is a flexible and cost-effective retirement savings option that provides investors with tax benefits, safety, and security, and multiple exit options

Investment options

Under the NPS, subscribers have the option to choose from two types of investment choices – Active Choice and Auto Choice. In the Active Choice option, subscribers can select their own investment allocation across different asset classes such as equity, corporate bonds, government securities, and alternate investment funds. In the Auto Choice option, the investment allocation is done based on the age of the subscriber. The allocation to equity is higher for younger subscribers and gradually decreases as the subscriber gets older.

Fund managers

The NPS has seven fund managers appointed by PFRDA who manage the investments of subscribers. The fund managers are chosen through a bidding process and are subject to periodic performance review by the PFRDA.

Withdrawal

Withdrawal from the Tier I account is allowed only at the time of retirement, subject to certain conditions. Subscribers can withdraw up to 60% of the corpus as a lump sum, and the remaining 40% has to be invested in an annuity to receive a regular pension. Withdrawal from the Tier II account is allowed anytime without any restrictions.

NPS tax exemption

NPS scheme offers various tax benefits to investors under the Income Tax Act, 1961.

Under Section 80CCD(1) of the Income Tax Act, an individual can claim a tax deduction of up to 10% of their salary (for salaried individuals) or gross income (for self-employed individuals) contributed towards NPS. This deduction is allowed within the overall limit of Rs. 1.5 lakhs under Section 80C and Section 80CCE of the Income Tax Act.

Additionally, under Section 80CCD(2), employers can also contribute up to 10% of the employee’s salary towards the employee’s NPS account. This contribution is over and above the limit of Rs. 1.5 lakhs allowed under Section 80C and is deductible from the employee’s taxable income. However, the deduction cannot exceed the amount of the employer’s contribution.

Apart from these deductions, under Section 10(12A) of the Income Tax Act, any withdrawal made from the NPS after retirement is exempt from tax up to 60% of the total corpus received. The remaining 40% must be compulsorily used to purchase an annuity plan from a life insurance company, which provides a regular pension income and is taxable as per the individual’s income tax slab.

Overall, NPS offers attractive tax benefits to investors and can be a useful tool to build a retirement corpus.

How to open nps account ?

To open an NPS account, you can follow the steps given below:

1. Choose a Point of Presence (PoP): Select a PoP from the list of authorized banks, financial institutions or other entities that offer NPS account opening services.
2. Submit the application form: Obtain the NPS application form either online or from the selected PoP. Fill in the required details such as personal information, nominee details, investment details, etc.
3. Provide KYC documents: Attach copies of your KYC documents such as Aadhaar card, PAN card, etc. along with the application form.
4. Choose an investment option: Choose an investment option based on your risk appetite and investment goals. You can select either the Active Choice or Auto Choice option.
5. Make the initial contribution: Make the initial contribution of at least Rs. 500 or Rs. 1000 depending on the chosen PoP. You can make the payment either through cash, cheque or online transfer.
6. Receive PRAN: Once the application is processed, you will receive a Permanent Retirement Account Number (PRAN) which will be your unique identification number for your NPS account.

Note: You can also open an NPS account online through the eNPS website.

How to open nps account online?

To open an NPS (National Pension System) account online in India, you can follow these steps:

1. Visit the official website of the National Pension System Trust (NPS Trust) or any authorized Point of Presence (PoP) service provider, such as banks or financial institutions that offer NPS services.
2. On the website, look for the option to “Open NPS Account” or a similar link. Click on it to proceed.
3. You will be redirected to the online registration page. Fill in the required personal information such as name, date of birth, PAN (Permanent Account Number), Aadhaar number, email address, and contact details.
4. Choose the type of NPS account you want to open. There are two types available: NPS-All Citizen Model and NPS-Lite/Swavalamban.
5. Select the preferred investment option: Active Choice or Auto Choice. In Active Choice, you can allocate your contributions across different asset classes, while in Auto Choice, the allocation is based on your age.
6. Nomination: Provide details of the nominee(s) who will receive the accumulated pension wealth in the event of your demise.
7. Complete the KYC (Know Your Customer) process. This involves providing necessary identification and address proof documents. You may need to upload scanned copies of these documents online.
8. Choose a password and set up a security question and answer for your NPS account.
9. Make the initial contribution to your NPS account. The minimum contribution to open an NPS account is Rs. 500. You can choose the mode of payment, such as net banking, debit card, or any other available options.
10. Review and submit your application.
11. After submission, you will receive an acknowledgement or PRAN (Permanent Retirement Account Number) application reference number.
12. Print the filled-in application form, paste a recent photograph, sign it, and send it to the address mentioned on the form within a specified timeframe along with the necessary supporting documents. This step completes the physical verification process.
13. Once the application is processed, you will receive your PRAN (Permanent Retirement Account Number) and other account details on your registered email address.

It’s important to note that the specific steps and procedures may vary slightly depending on the service provider or the NPS variant you choose. It’s advisable to visit the official website of the NPS Trust or consult with authorized service providers for the most accurate and up-to-date information regarding the online account opening process.

NPS tier 1 vs tier 2

NPS or the National Pension System is a government-sponsored pension scheme that offers two different types of accounts, Tier 1 and Tier 2. Here are the differences between the two:

1. Purpose: The Tier 1 account is a mandatory account for all government employees and is designed for long-term retirement savings. On the other hand, the Tier 2 account is a voluntary account and can be opened only by individuals who already have a Tier 1 account. It is more flexible and allows investors to withdraw their money whenever they want.
2. Withdrawals: In Tier 1, withdrawals are restricted and can be made only after the account holder reaches the age of 60. In case of emergencies, partial withdrawals are allowed, but only up to a certain limit. In Tier 2, there are no restrictions on withdrawals, and investors can withdraw their money whenever they want.
3. Tax Benefits: Both Tier 1 and Tier 2 accounts offer tax benefits under Section 80C of the Income Tax Act. However, in Tier 1, the tax benefits are higher as contributions made to this account are eligible for an additional deduction of up to Rs. 50,000 under Section 80CCD(1B).
4. Investment options: The investment options available in both Tier 1 and Tier 2 accounts are the same. The account holder can choose to invest in different asset classes like equities, corporate bonds, government securities, etc.

In summary, Tier 1 account is mandatory, meant for long-term retirement savings and has limited withdrawals, while Tier 2 is a voluntary account, more flexible with no restrictions on withdrawals.

Frequently Asked Questions (FAQ)

The National Pension Scheme is a great way for individuals to plan for their retirement and build a corpus over time. With its tax benefits, flexibility in investment options, and choice of fund managers, the scheme offers a great deal of convenience and transparency. It is recommended that individuals start contributing towards the NPS early in their careers to maximize the benefits of the scheme.

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