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National Pension System (NPS): A Detailed Guide

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National Pension System: A Detailed Guide
October 25, 2023

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Retirement planning is crucial for financial independence. Investing in the National Pension System (NPS) is among the best pension option. Here's what you need to know about this retirement savings scheme.

What is the National Pension System (NPS)?

The National Pension System (NPS) is a government scheme providing a stable income in retirement. It's a voluntary savings scheme with a minimum annual investment until age 60. Two types of accounts exist: Tier-I (mandatory) and Tier-II (optional with Tier-I).

How Does NPS Work?

To invest in the National Pension System, open a Tier-I or Tier-I and Tier-II account. Then, start investing regularly or with a lump sum amount. Your investments join others' based on your risk profile. At age 60, withdraw up to 60% as a lump sum and use the remainder to purchase an annuity plan for regular post-retirement payments.

What are the Features and Benefits of the National Pension System?

The National Pension System offers plenty of features and advantages that make it one of the best pension options in India. Here’s an overview of some of the most important benefits and features of this scheme.

  • NPS eligibility: Indian citizens aged 18-60 can invest.
  • NPS account types: Tier-I (withdrawal restrictions) and Tier-II (no withdrawal restrictions).
  • Minimum contribution limits based on account type.
  • Regular or lump sum investments in NPS.
  • Choose market-linked asset class for investment.
  • NPS regulated by the Indian government.
  • Partial withdrawal available after 10 years.

Charges Associated with an NPS Account

Compared to some of the other best pension options, the charges associated with the National Pension System are relatively low. Here’s a table outlining some of the key charges that apply to NPS accounts.

Particulars

Charges

Permanent Retirement Account (PRA) opening charges

Rs. 15 to Rs. 40

(depending on the service provider)

Annual Account Maintenance Charge

Rs. 14.40 to Rs. 69

(depending on the service provider)

Initial Registration Charges

Rs. 200 to Rs. 400

(depending on the service provider)

Financial Transaction Charges

0.50% of the contribution, subject to a minimum of Rs. 30 and a maximum of Rs. 25,000.

Non-Financial Transaction Charges

Rs. 30

Asset Servicing Charges

0.000000001770% per annum

(for electronic & physical segments)

Investment Management Fee

0.03% to 0.09%

(depending on the AUM of the pension fund you invest in)

Tax Deductions for Investments in the National Pension System

The investments that you make in a Tier-I NPS account can be claimed as a deduction from your total taxable income. Here’s a quick overview of the amount that you can claim as a deduction under various sections of the Income Tax Act of 19611.

Income Tax Act, 1961

Maximum Claim Amount

(per financial year)

Available For

Section 80CCD(1)

10% of Basic Pay + Dearness Allowance (salaried) or 20% of gross income (self-employed), subject to an overall limit of Rs. 1,50,000

Salaried and self-employed individuals

Section 80CCD(1b)

Rs. 50,000

Salaried and self-employed individuals

Section 80CCD(2)

10% of Basic Pay + Dearness Allowance

Salaried individuals only

Note: The deductions applicable under sections 80CCD(1b) and 80CCD(2) can be claimed over and above Rs. 1.5 lakhs limit as per section 80CCD(1). That said, the maximum amount that you can claim as a deduction under all of the three sections combined is limited to Rs. 2 lakhs per financial year.

Who Should Invest in the National Pension System?

As you know by now, the National Pension System is one of the best pension options available in the country. Here’s a list of individuals who should consider investing in NPS -

  • Individuals who prefer investing for the long-term
  • Individuals who wish to enjoy a steady source of income each month after their retirement
  • Individuals looking for a tax-efficient retirement savings scheme
  • Individuals who prefer investing in a safe, reliable and well-regulated investment scheme
  • Individuals who are looking for a flexible investment option that provides market-linked returns

How to Open a National Pension System Account?

An NPS account can be opened online by visiting either of the 3 Central Record Keeping Agencies (CRAs) empowered by the National Pension System. Here’s a brief outline of the steps that you need to follow to open an NPS account online.

  • Step 1: Visit preferred CRA's NPS registration website.
  • Step 2: Enter required details for registration.
  • Step 3: Authenticate registration with OTP.
  • Step 4: Complete NPS account opening application, specifying account type and fund preference.
  • Step 5: Upload ID and address proof documents.
  • Step 6: Submit application and make initial payment.
  • Step 7: Authenticate account through Aadhaar-OTP verification (depending on CRA).

Once you complete the OTP verification, you will receive your Permanent Retirement Account Number (PRAN) and your login credentials via email. You can use your credentials to log in and manage your NPS account.

Wrapping-Up

The National Pension System offers excellent retirement benefits, including a lump sum amount and regular income at age 60. However, considering additional financial products like life insurance can provide a safety net for your family and leave behind a substantial inheritance. 

Annuity Service Providers:

PFRDA is a statutory body set up by the Government of India to regulate and develop the pension sector in India. An annuity pension is a type of pension in which the pensioner receives a fixed monthly income as per terms and condition of the plan

The relationship between PFRDA and ASPs (Annuity Service Providers) is that PFRDA is the regulator of the National Pension System (NPS), and ASPs are the entities that provide annuity services to NPS subscribers. When an NPS subscriber reaches the age of 60, they are required to annuitize at least 40% of their pension wealth. They can do this by purchasing an annuity from an ASP that is empanelled by PFRDA

You can select any of the annuity schemes offered by Annuity Service Providers (ASPs) registered with IRDAI and empaneled with PFRDA. HDFC Life is one of the registered ASPs for annuity issuance and further servicing.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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  1. Subject to conditions specified u/s 80C of the Income tax Act, 1961.
    The afore stated views are based on the current Income-tax law. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
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