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National Pension Scheme (NPS)

NPS is an initiative undertaken by the Government of India, which seeks to provide retirement benefits to all citizens of India, even from the unorganized sectors. Regulated and administered by the PFRDA or Pension Fund Regulatory and Development Authority under the PFRDA Act 2013, NPS is a defined, voluntary contribution scheme that is market-linked and managed by professional fund managers.

Contributions made by individual subscribers to the National Pensions Scheme under the system accumulate until retirement and corpus growth continues via market-linked returns. Subscribers also have an option to exit this plan before retirement or opt for superannuation. However, this scheme ensures that a part of savings is utilised to provide a subscriber with retirement benefits.

Thus, on retirement, exit or superannuation, at least 40% of the contribution is utilized for the procurement of lifetime pension via the purchase of an annuity. The remaining funds are paid to the subscriber in a lump sum.

Objective of the National Pension System

  • A substantial corpus creation for one’s retirement phase is an essential aspect to take care of during financial planning. 
  • It not only allows individuals to fulfil their expenditure requirements but also allows them to sail through their post-retirement life with the least hassles.
  • To address this concern of the growing senior citizen demography in the country, the Indian Government thus introduced schemes like the National Pension System or NPS
  • The scheme allows for systemised savings during one’s working years, thus inculcating a financial discipline among individuals to save for the future.

NPS Scheme Details and Features

Liquidity and flexibility via two different account types.

The National Pension System allows individuals to make systematic investments via either of the following two accounts. Account opening with the National Pension System is followed by the generation of a unique Permanent Retirement Account Number or PRAN issued to each subscriber. Fund management, including contribution to this scheme, is done via PRAN.

  • Tier-I account
  • Tier-II account

The former functions as a pension account and withdrawals from it are subject to specific restrictions. An individual can open this account with a minimum deposit of Rs. 500.

As for Tier-II accounts, they are voluntary accounts providing liquidity of funds via investments and withdrawals. The minimum deposit one needs to make for a Tier II account is Rs. 250. However, investments in Tier-II accounts are allowed only when an active Tier I account in the subscriber’s name exists.

Thus, as per the National Pension System architecture, individuals can subscribe to the National Pensions Scheme with PFRDA-appointed intermediaries via the two accounts mentioned above. These intermediaries can include – 

  • Trustee banks
  • Custodians
  • CRA or Central Recordkeeping Agency
  • NPS trust
  • PoP or Points of Presence
  • Annuity Service Providers.

Flexibility of investment via two different options

Subscribers can opt for either of the following two investment options, thus providing the flexibility of choice.

Auto choice

It is available as a default option for subscribers as per the system. Fund investments under this option are managed automatically by an appointed fund manager as per an investor’s age profile.

Active choice

Under this option, individuals are free to decide among available asset classes in which to invest their funds. Also, they can allocate different percentages of contributed funds to be invested in with a maximum cap of 50% for Asset Class E or Equities. Other Asset Classes include Class C, i.e., Corporate Debt Securities and Class G or Government Securities.

Alongside, subscribers also have an option to switch their investment options as well as change their fund manager. These options are, however, subject to certain constraints.

Option to make a partial withdrawal

Another of NPS scheme benefits includes an option to withdraw their contributions partially. It gives individuals partial accessibility to their funds saved over the years, thus allowing them to meet financial needs before retirement during emergencies.

As per the rules regarding partial withdrawal, a subscriber can make withdrawals of their Tier I scheme contribution up to a maximum limit of 25%.

Withdrawals are, however, subject to the following clauses.

  • Contributions up to a minimum of 10 years must be made for the partial withdrawal facility to apply.
  • Also, there should be a minimum gap of 5 years between two consecutive withdrawals.

Types of Accounts

Tier I and Tier II are the two primary account types under the NPS. The first is the default account, while the second is an optional addition. The table below provides a detailed explanation of the two account kinds.

NPS Tier – 1 Account NPS Tier – 2 Account
Status Default Voluntary
Withdrawal Not Permitted Permitted 
Tax Exemption Until Rs.2 lakhs per annum From 1.5 lakh for government employees and none for others
Minimum Contribution From ₹500 o r ₹1000 per annum ₹250
Maximum Contribution No Limit No limit

How to Apply for an NPS Account

Individuals can register and obtain a subscription to the National Pension System through the online platform eNPS. Registration for the scheme can be done in the following steps.

Step 1 – Go to the eNPS portal available at the official website of the National Pension System.

Step 2 – Choose your subscriber type from the available options ‘Individual Subscriber’ and ‘Corporate Subscriber’.

Step 3 – Choose your suitable residential status. The options include ‘Citizen of India’ and ‘NRI’.

Step 4 – Opt for either Tier I account type or both accounts as a choice of the former is mandatory for long-term savings.

Step 5 – Enter your PAN details and select a suitable bank or PoP. It is ideal to choose a PoP with whom you have an existing relationship such as a savings/current/Demat/account for KYC verification as the chosen PoP will do it.

Step 6 – Upload the scanned copy of your PAN card along with a cancelled cheque. The image format should be in .jpg, .jpeg or .png format with a file size of 4KB to 2MB.

Step 7 – Next, upload your scanned photograph and signature in the same format and size as above.

Step 8 – Once routed to the payment gateway, proceed to pay the required charges via net Banking.

Step 9 – With the completion of payment, your Permanent Retirement Account Number will be generated.

How to Apply for NPS Account Offline

To open an NPS account offline or manually, you must first locate a PoP – Point of Presence (which might be a bank). Collect a subscriber form from your nearest PoP and turn it in with your KYC documents. If you are already KYC-compliant with that bank, disregard.

The PoP will issue you a PRAN – Permanent Retirement Account Number – once you make the initial contribution (not less than Rs.500, Rs.250 monthly, or Rs.1,000 annually).

This number, along with the password in your sealed welcome kit, will assist you in operating your account. This method requires a one-time registration cost of Rs.125.

How to Log In to the NPS Account

Step 1: You must have a 12-digit Permanent Retirement Account Number in order to log into your NPS account (PRAN). To obtain PRAN, submit the required documentation on the NSDL website or at a Point of Presence (POP) service provider.

Step 2: Go to https://enps.kfintech.com/login/login/ to access the eNPS login page.

Step 3: If you are a first-time visitor and do not remember your password, go to the bottom of the page and click on the ‘Generate/Reset password’ option.

Step 4: To generate an OTP, enter your PRAN, date of birth, and captcha, then click the ‘Submit’ button.

Step 5: A one-time password (OTP) will be given to your registered mobile number. Your password will be validated once you enter this OTP on the screen.

Step 6: Return to the login screen and type in your PRAN, password, and captcha. Select the ‘Login’ option.

Step 7: You will be routed to your account’s home page.

Tax Benefits Under the Scheme

Income tax benefits for National Pension Scheme investments are available under the following sections.

Applicable Sections under the Income Tax Act 1961 Tax Benefits Allowed
U/S 80CCD (1) Own contribution of a subscriber towards Tier I investments tax-deductible within the total ceiling of Rs.1.5 lakh u/s 80C.
U/S 80CCD 1(B) In addition to deductions under section 80CCD (1), subscribers are allowed up to Rs.50,000 as deductions towards Tier I contributions.
U/S 80CCD (2) Contribution of an employer towards Tier I investments is eligible for deduction up to 14% for central government contributions and up to 10% for others. This deduction is over and above the deduction limit applicable u/s 80C.

The National Pension Scheme Details has other tax benefits on NPS Tier I investments include – 

  • Up to 25% of Tier I contributions withdrawn by a subscriber are exempt from tax.
  • Annuity purchase from the National Pension Scheme corpus is tax-exempt. However, income generated from such annuity in the following years is taxable.
  • Lump-sum withdrawal of up to 40% of an NPS corpus after a subscriber turns 60 is exempt from tax.

Thus, after 60 years of age if the total corpus created through the National Pension System amounts to Rs. 20 Lakh, a lump sum withdrawal of 40%, i.e., Rs.8 lakh will not attract any tax. Further, if you utilise the remaining 60% of funds for annuity purchase, the entire corpus will be tax-free. Only that, the income generated from the annuity will be taxable.

Eligibility of NPS

An individual’s eligibility for the National Pension System depends on the various NPS models in operation. These are – 

Government sector National Pension System model

The pension system is applicable for government employees, both central and state, except for those employed with the armed forces. Under this model, a contribution of 10% of a government employee’s salary goes to the National Pension System with an equal contribution by the government. Central Government employees receive a contribution of 14% from the government. 

Also, all states in the country have implemented the NPS National Pension System, excluding the Government of West Bengal.

The corporate model of the National Pension System

As per the corporate model, corporate employees enrolled by their employers can utilise the NPS benefits of the pension system. To do so, they must be Indian citizens between the age of 18 and 60 years fulfilling the KYC requirements.

The model is applicable for entities as under.

  • Registered as per the Companies Act.
  • Registered under different Co-Operative Acts.
  • Identified as Central or Public Sector Enterprises.
  • Identified as a proprietary concern.
  • Registered as partnership firms or LLPs.
  • Incorporated vide order from a State or Central Government.
  • Identified as a society or a trust.

All citizens model of NPS

All citizens of India meeting the following eligibility criteria can voluntarily opt for enrolment and contribute to the NPS pension scheme towards their retirement security.

  • He/she should be between 18 and 60 years of age on the date when applying with a PoP service provider.
  • He/she should fulfil the KYC requirements as required in the Subscriber Registration Form and submit all necessary documents.

National Pension System – FAQs 

Q1. Who can make investments with the National Pension System?

Ans. Any Indian citizen between the age group of 18 and 60 complying with the KYC requirements and qualifying for either of the NPS models can invest with the system.

Q2. Is saving with the National Pension System allowed for an NRI?

Ans. Yes, an NRI can opt for the National Pension Scheme for retirement corpus creation provided he/she maintains the residential status until exit from the scheme.

Q3. How would I know if my bank serves as a PoP for the scheme or not?

Ans. You can check the list of authorised PoPs at NPS’s official website to confirm whether your bank serves as a PoP or not.

Q4. Can an individual invest in more than one National Pension Scheme?

Ans. No, the scheme comes with a unique PRAN for each individual and thus does not allow multiple accounts for a single person.

Q5. Can I withdraw before retirement?

You can always withdraw the money before you retire, but somehow the national pension scheme benefits are most reaped after the completion of the tenure, and it is recommended to stay invested the longest.

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