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What is NPS (National Pension System)?

The National Pension System (NPS) is a well-regulated retirement plan started by the Pension Fund Regulatory and Development Authority (PFRDA) in 2004. It was initially only for government employees, but from 1st May 2009, it was also available to private sector employees. The NPS offers a structured way to save money during working years, with tax benefits and flexible investment options. ...Read More

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Pension Schemes and Retirement Plans

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Pension Schemes and Retirement Plans

What is National Pension Scheme?

What is NPS (National Pension Scheme)?
May 01, 2024

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National Pension system (NPS) is a well-regulated retirement-scheme. The Pension Fund Regulatory and Development Authority (PFRDA) launched this scheme in 2004. Initially, the scheme was available only to government employees. However, later on, NPS was made accessible to all individuals including the NRIs. NPS provides a stable income to its account holders after retirement along with tax savings.

Account holders subscribing to the pension scheme can continue contributing to their pension account during their years of employment. One can withdraw about 60% of the deposited amount in a lump sum after retirement. The rest 40% can be utilised to purchase an annuity from NPS proceeds for earning a pension after retirement.

Who Should Invest in the NPS?

If you are an individual investor, the NPS scheme will be an ideal option for you.

This structured retirement savings plan can bring massive changes in your post-retirement life. Additionally, if you aim to save a substantial amount of taxes through Section 80C deductions, you can opt for this scheme and make your post-retirement life safe and secure.

How Does the NPS Scheme Work?

The National Pension System provides the subscribers financial security in their post-retirement life. It is an entirely voluntary and flexible scheme allowing you to increase your retirement income. Anyone between the ages of 18 and 70 years can start investing in NPS.

Account holders need to pay a minimum contribution every year; they must invest at least Rs. 1,000 per year and Rs. 500 to open an account. The amount is invested in market-linked securities and the returns depend on the amount invested and returns from assets. At the age of 60, the investor can withdraw up to 60% of the accumulated sum. The rest must be used to buy an annuity plan that provides regular income for life.

If under unfortunate circumstances, the account holder dies before 60 years of age, the nominee will receive the entire sum amount. Subscribers within 18-60 years cannot make full withdrawal till they have completed 10 years in the NPS scheme. If the investor makes a premature withdrawal (before retirement) he or she must first purchase an annuity plan before withdrawing the rest.

There are two types of NPS accounts, namely, Tier 1 and Tier 2 accounts. Let’s discuss them in detail:

  • Tier 1 Account: Also known as the primary NPS account. It has a lock-in period of 60 years of age. You cannot withdraw until you reach 60 years of age. However, there is allowance of partial withdrawal. Moreover, with a Tier 1 account, you can avail all the tax benefits.
  • Tier 2 Account: With a Tier 2 account, there is no lock-in period and you can withdraw anytime. It offers greater flexibility in terms of withdrawal at any point of time. No tax benefits are provided to Tier 2 account holders.

Contributions in NPS are invested under different asset classes, namely, corporate bonds, equity, government securities and alternative investment funds.

NPS offers you two approaches to invest in your account:

  • Auto Choice: In auto choice, the asset allocation is determined considering your age.
  • Active Choice: With active choice, the amount of money allocated to each NPS asset class is decided by the NPS subscriber.

Features and Benefits of NPS

Following are some of the important features and benefits of the NPS scheme:

  • Flexibility

You get the freedom to decide your investment allocation depending on your risk appetite and the return expectations. You also get the flexibility to shift your pension fund manager and scheme preference in case not satisfied with the performance.

  • Returns/Interest

A certain portion of the National Pension System goes into equities. Thus, NPS provides much higher returns than traditional tax-saving investments. This scheme to date has successfully delivered around 9% to 12% annualised returns. Moreover, while investing in NPS, account holders are allowed to change their fund manager if unsatisfied with the fund performance.

  • Dual benefit of Low Cost and Power of Compounding

Benefit of lowest account maintenance is achieved here when compared to similar pension funds. When one plans for long term investments NPS steps in, as the accumulated corpus grows over a period of time at a compounding rate and offers optimum market linked returns based on your investment choice.

  • Regulated

The PFRDA implements transparent investment norms for regulating NPS. Alongside, it also conducts performance reviews regularly and keeps an eye on the performance of fund managers.

  • Online Access

You can open your NPS account online through the NPS portal from anywhere in the world. The facility of making contributions is also available online. You can manage/ access your NPS account online through the portals.

  • Portable

Subscribers can operate their account from anywhere, even if they change the city and/or employment.

National Pension System Tax Benefits

NPS account holders can enjoy several tax benefits under the Income Tax Act. Here are the underlying NPS tax benefits that every account holder can avail.

A. Tax Benefits to Employee’s on Self-Contribution

Employees contributing to NPS can avail the following tax benefits on their contributions:

a) 10% deduction of Salary including basic and DA u/s 80CCD (1), subject to Rs. 1.5 lakh maximum under Section 80CCE.

b) Over and above the maximum limit of Rs. 1.5 lakh under Section 80CCE, one can claim additional deductions of up to Rs. 50,000 under Section 80CCD (1B).

c) Contribution of the Employer towards the NPS Scheme allows for a maximum deduction of 10% of Salary including basic & DA while government employees can get a deduction of 14% of their salary.

B. Tax Benefits for Self-Employed Individuals

Self-employed individuals can avail the following tax benefits on their self-contribution towards NPS:

a) Deduction of up to 20% of your gross income as per Section 80CCD (1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.

b) Self-employed individuals can also enjoy an additional deduction of Rs. 50,000 u/s 80CCD(1B) over and above the maximum limit of Rs. 1.5 lakh existing under Section 80CCE

C. Tax Benefits to Corporate/Employers

Contribution of an employer to the NPS scheme allows for a tax deduction of up to 10% of the salary of the employee including basic and DA, can be claimed as a  'Business Expenditure under Section 36(1)(iv)(a).

D. Tax Benefit on Annuity Purchase

a) Individuals with the NPS scheme can avail tax exemption on the purchase of an annuity plan upon attaining the age of  60 years or superannuation under Section 80CCD (5)

b) However Subsequent income received from the annuity is taxed u/s 80CCD (3)

E. Tax Benefits on Lump Sum Withdrawal at the Age of 60

The account holder can avail tax exemption on lumpsum withdrawal of 60% of the accumulated pension upon attaining the age of 60 years or superannuation under Section 10(12A) of the Income Tax Act.

F. Tax Benefits on Partial Withdrawals

Following the criteria set by PFRDA, account holders are eligible for tax exemption on partial withdrawal from NPS after a certain time period of investing. The withdrawal amount must be up to 25% of self-contribution under Section 10 (12B).

NPS Withdrawal Rules after Retirement (60 years)

You cannot withdraw money from NPS until you attain 60 years of age. Following NPS withdrawal rules, upto 60% of the total corpus withdrawn in lump sum is exempt from tax. With the remaining 40% corpus, you need to purchase an annuity (pension) plan.

For example, at maturity, your invested sum is Rs. 1 crore. In this scenario, you can withdraw up to 60% of Rs. 1 crore i.e., Rs. 60 lakh as a lump sum once your NPS account matures without paying any tax. The rest 40% of the amount must be utilised to purchase annuity from an empanelled Annuity Service Provider (ASP). Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.

However, under any unforeseen circumstances, you might need some funds in an emergency. Taking this into consideration, NPS allows you to withdraw funds partially before NPS matures.

A. Partial Withdrawal

Before maturity, you can make partial withdrawals from your NPS account for specified purposes. PFRDA under emergency, allows you to withdraw after three years but only 25% from your Tier 1 account.

Amount received from partial withdrawal are tax exempt u/s 10 (12B) of Income Tax Act.

Equity Allocation Rules

There are different schemes under NPS. There are two investment options for account holders, namely, auto choice and active choice.

For auto choice, the older you become, the less risky your investment will be. On the other hand, with active choice, you can divide your investment as per your needs into different schemes and invest accordingly.

Option to Change the Scheme or Fund Manager in the NPS

If you are not happy with your current fund manager’s performance, you can change the scheme or the fund manager. This is applicable for both Tier I and Tier II account holders.

National Pension Scheme Eligibility

To open a National Pension System, it is mandatory for the account holders to fulfil the following eligibility criteria:

B. The citizen should be an Indian whether resident or non-resident or Overseas Citizen of India

C. He or she should meet all the norms of Know Your Customer (KYC) outlined in the application form.

D. Must be aged between 18 to 70 years.

E. Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) are not eligible for NPS subscription. They must possess legal competence for executing a contract existing under the Indian Contract Act. An NPS account cannot be opened on behalf of a third person since it is an individual pension account.

How to Invest in NPS?

  • A Guide to Investing in NPS

To subscribe to the NPS, an individual needs to open an account at a Point of Presence or POP Alternatively, one can also sign up for an NPS account online. Most public and private sector banks and several financial institutions are listed as POPs. Certain Point of Presence Service Providers (POP-SPs) are also authorised collection points where individuals can open accounts. The full list of POPs and their corresponding locations can be found on the Pension Fund Regulatory and Development Authority's (PFRDA's) website.

In order to enrol in the NPS scheme, investors will need to submit the following documents at the POP:

  • Permanent Account Number (PAN) Card
  • Aadhaar Card
  • Address Proof
  • Identity Proof
  • Passport-Sized Photographs

  • Making Contributions

Individuals can contribute to the NPS either directly or through their employer, if their employer offers NPS as a benefit option. Direct contributions can be made online through the eNPS or via cash or cheque. On the other hand, for contributions that are routed through the employer, subscribers will need to get in touch with their HR or Compensation and Benefits (C&B) team. You can leverage NPS as one of the one-time investment plans where you can invest ones and reap benefits for the long term.

  • Minimum Contribution Required

  • For Tier I Accounts:

An annual contribution of at least INR 1,000 needs to be made to keep the NPS account active. Every time a contribution is made to the NPS, it should be at least INR 500. There is no upper limit on the number of contributions that can be made in a single year.

  • For Tier II Accounts:

Unlike a Tier I account, yearly contributions to Tier II NPS accounts are entirely voluntary with no minimum requirement. However, to open a new Tier II account, at least INR 250 must be invested. Similar to the Tier I account, there's no upper limit on the number of contributions that can be made.

Types of NPS

There are two types of NPS accounts that an individual can choose from:

1. Tier I This account is opened by every individual when they subscribe to the NPS. Typically speaking, withdrawals cannot be made from this account before the investor reaches the age of 60. In certain cases, however, partial withdrawals can be allowed from the account in case of a critical illness, for the investor's children's education, for wedding expenses, or to purchase or construct a home. It's important to note that the maximum partial withdrawal allowed is only 25% of the collected corpus.

2. Tier II This functions more like a savings account and there is no restriction on the number of withdrawals that can be made. The opening of these accounts, are completely voluntary, and investors can choose to open it at any time, as long as they already have an active Tier I account. Investors can request to withdraw money from this account online by using the login ID and password that has been provided to them by the Central Recordkeeping Agency (CRA).

Asset profile options

The PFRDA selects fund managers to invest the money contributed by individuals towards their NPS accounts. Fund managers must manage the money in 3 separate accounts having separate asset profiles viz. Equity (E), Corporate bonds (C) and G Government securities (G).

Investors can choose from one of the two options:

1. Active choice: Here the investor has the choice to invest in E-C-G so long as the allocation to Equity or E does not exceed 75%

2. Auto choice: Here the investor delegates the asset allocation to a lifecycle fund which has a predefined portfolio combination based on age

Taxation

Contributions made to the NPS by the investor are eligible for deductions under 80C  under Section 80CCD. This is up to Rs 1,50,000 under Section 80 CDD(1) and an additional Rs 50,000 under Section 80CCD (1B).

How to Log in to the NPS Account

Once you create your NPS account, you can log into the account through various portals including the KFintech portal, NSDL NPS or net banking.

Here is a detailed overview of logging into your NPS account through the above-mentioned portals:

  • Through the NSDL NPS Portal

If you are logging into the NSDL NPS portal for the first time, you will have to register yourself to the official site by creating a new password. Follow the below steps to complete the procedure:

Step 1: Login into the official portal of NSDL NPS and select ‘Login with PRAN/IPIN’.

Step 2: To create a new password, select ‘Reset Password’ on the displayed login screen.

Step 3: Enter all your necessary details including Permanent Retirement Account Number (PRAN), new password and your date of birth. After this, confirm the entered password and the CAPTCHA. Click on ‘Submit’.

Step 4: Upon submission, an OTP will be sent to your registered mobile number. Enter the required OTP and confirm the new password. This will thereby enable you to log into your E-NPS account with a new password and PRAN.

If you are an existing NPS account holder in the NSDL portal, follow the below steps to log in:

Step 1: Enter the PRAN and password and log into the portal.

Step 2: Submit all the necessary details to access your E-NPS account.

  • Through the KFintech NPS Portal

If you are new to the KFintech NPS portal, follow the below-mentioned steps to log in:

Step 1: Visit the official portal of KFintech NPS.

Step 2: Go to ‘Login’ and select ‘Existing Subscriber’. On the page displayed, click on ‘Reset Password’.

Step 3: Next, enter all the necessary information including your PRAN, date of birth and Captcha Code. Once provided, click on the 'Submit' button.

Step 4: You will receive an OTP on your registered mobile number. Provide the OTP and then create a new password. This will thereby allow you to log into your E-NPS account.

If you are an existing customer, follow the below steps to log into the KFintech NPS Portal:

Step 1: Login into the portal and then click on ‘Existing Subscriber’.

Step 2: On the displayed login screen, enter your details including password, PRAN and CAPTCHA code to log in.

NPS Customer Care Number

If you are a NPS account holder and face any issues, you can contact the following customer care numbers:

  • NPS Call Centre Number: Simply dial 1800 110 708
  • NPS SMS Number: Send NPS to 56677
  • For Registered Subscribers (with PRAN), NPS Toll-Free Number: Dial 1800 222 080

FAQs on NPS?

1. Who is eligible for the NPS scheme?

Any Indian citizen aged whether Resident or Non Resident aged between 18 and 70 years is eligible to invest in the NPS scheme. Citizens are eligible to join the NPS scheme as individuals or employee-employer groups.

However, Hindu Undivided Families and Persons of Indian Origin are not eligible for subscribing to NPS.

2. What are the Tier 1 and Tier 2 NPS accounts?

Tier I and Tier II are two different types of NPS accounts.

Tier-I account: This is the permanent retirement account into which the regular contributions made by the subscriber and/or their employer and are credited and invested as per the scheme/fund manager chosen by you. Here withdrawal are as per Exit & Withdrawal rules and regulations as prescribed.

Tier-II account: This is a voluntary / optional withdrawable account which is allowed only you have an an active Tier I account. The withdrawals are permitted from this account as and when you require.

 Tier I is the basic and primary NPS investment account and account holders can enjoy tax benefits under this account. However, this account has certain restrictions on withdrawals and you can withdraw only once you meet the NPS exit conditions.

On the other hand, Tier II allows you to withdraw at any time but it offers no tax benefits.

3. Is it good to invest in NPS?

If you are planning for retirement at an early age or seeking to avail tax benefits under 80C deductions, it will be ideal for you to invest in NPS.

4. Is NPS tax-free on maturity?

Up to 60% of the Investment corpus at maturity can be withdrawn without paying any taxes. The remaining 40% has to be invested in annuities which is also exempt from tax. Only annuity income that you receive in subsequent years will be subject to income tax under Section 80CCD(5).

5. What is the NPS interest rate?

NPS interest rate keeps on fluctuating since it is market-linked. At present, the NPS returns rate is between 9%-12% per annum for minimum of 3 years period, depending on the scheme.

6. Is there NPS for private sector employees?

You are eligible to open your NPS account if you work in any corporate who has adopted the NPS scheme and fulfil the eligibility criteria of being an Indian citizen aged between 18 and 70 years whether resident or Non Resident..

7. Do I earn a fixed return on NPS?

NPS does not offer any fixed returns. The returns under NPS are market-linked.

8.  Will I get the tax benefits on investment in NPS Tier-II account?

No tax benefits are available on contributions made in an NPS Tier-II account.

No tax rebates/special treatment for the gains arising out of investment in NPS Tier-II are available. The taxation as per the marginal tax rate will be applicable to you.

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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