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What is NPS? - Features, Benefits you need to know

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Feature and Benefits of NPS
October 30, 2023

Table of Content

 

What is the National Pension System (NPS)?

Introduced by the government of India, the National Pension System (NPS) is a voluntary retirement savings scheme where you need to contribute a minimum amount each year at desired frequency until you attain 60 years of age.  

Once you attain 60 years of age, you can withdraw up to 60% of the accumulated corpus lump sum. The remaining corpus in your NPS account is invested in an annuity plan which is a pension plan policy offered by a life insurance company. It provides you with a regular source of income at desired frequency for life.

What are the Features of NPS?

The National Pension System offers a plethora of unique features that make it one of the best pension plans in India. Here’s an overview of some of the scheme’s key features.

Relaxed Eligibility Criteria

Unlike other investment schemes, the eligibility criteria for investing in NPS are very relaxed. Any Indian citizen aged between 18 and 60 years can invest in the scheme.

Multiple Types of NPS Accounts

There are two types of NPS accounts that you can open - Tier-I and Tier-II. The Tier-I account is a mandatory account with withdrawal restrictions. The Tier-II account, meanwhile, is an optional account that you can open only if you have a Tier-I account. The Tier-II account has zero withdrawal restrictions, allowing you to freely withdraw funds as and when you require.

Minimum Contribution Limits

The National Pension System has certain minimum contribution limits that you need to adhere to depending on the type of account you open. Here’s a table outlining the different investment limits.

Particulars

Tier-I NPS Account

Tier-II NPS Account

Minimum contribution at the time of account opening

Rs. 500

Rs. 1,000

Minimum contribution limit (per transaction)

Rs. 500

Rs. 250

Minimum contribution per annum

Rs. 1,000

Not Applicable

Minimum contribution frequency per annum

1

Not Applicable

Flexible Contribution Options

With NPS, you get the flexibility to choose the frequency of contributions. You can choose to make a lump sum contribution each year or regular contributions at your desired frequency.

Different Investment Choices

The National Pension System allows you to choose the type of market-linked asset class that you wish to invest in. You have the freedom to choose either equity, debt or hybrid funds depending on your investment preference and risk profile.

Partial Withdrawals

In the case of a Tier-I NPS account, you can make partial withdrawals after completing 10 years from the date of account opening. The maximum amount that you can partially withdraw is limited to 25% of the total contribution.

What are the Benefits of NPS?

The host of different advantages that the National Pension System offers makes it one of the most popular pension plans in India. Let’s take a look at a few of the key benefits offered by this scheme.

Ability to Switch Between Investment Options

NPS gives you the option to switch from one investment fund to another. This unique ability can come in handy during market downturns since you can simply opt to switch from equity funds to debt funds to preserve your capital.

Compounding Effect

As you continue to make regular contributions to your NPS account every year till your retirement, you bring about a compounding effect.

Easy Accessibility

Once you open an NPS account, you’re provided with a login ID and password. You can use these credentials to log into your NPS account and manage it online.

Transparency and Oversight

The National Pension System is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA safeguards the interests of investors by ensuring transparency and adherence to all the applicable investment guidelines and norms.

Tax Benefits

Contributions that you make towards Tier-I NPS accounts are eligible for tax benefits. You can claim a maximum of up to Rs. 1.5 lakhs per financial year as a deduction under section 80C of the Income Tax Act, 19611. You also get an additional deduction of Rs. 50,000 under section 80CCD(1B).

Conclusion

All of these features and benefits of the National Pension System make it an attractive long-term retirement savings option. That said, you can also diversify your retirement portfolio with other financial products like Annuity Plans, Endowment Plans and Unit-Linked Insurance Plans2.    

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 Vishal Subharwal

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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Disclaimer

  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.

  2. The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

    For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully before concluding a sale. Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. 
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