NPS Tier 1 Account - Tax Benefit, Scheme, & How to Withdraw Online
The National Pension Scheme is one of India's most popular retirement planning instruments. The National Pension System Trust (NPS Trust) manages the scheme. The NPS Trust is a division of the PFRDA, or Pension Fund Regulatory and Development Authority. The PFRDA comes under the Indian Ministry of Finance’s jurisdiction.
The PFRDA formed the NPS Trust according to the Indian Trusts Act of 1992’s provisions. The NPS Trust monitors the activities of various NPS intermediaries, such as Pension Funds, Custodians, Central Recordkeeping agencies (CRA), Trustee Banks, Aggregators, Points of Presence, and Annuity Service Providers (ASPs). The Trust also coordinates with Pension Funds (PFs) to ensure that the subscribers’ interests are supreme.
A quick scan of NPS subscription status proves that more and more investors are reposing their faith in this government-backed pension scheme for the masses. For instance, the total number of subscribers was 1,57,44,183 in FY 21-22, as against 1,43,90,544 in FY 20-21 and 1,34,12,640 in FY 19-20. Similarly, the total AUM (Asset Under Management) of NPS was 7,15,670 in FY 21-22, as against 5,62,338.33 in FY 20-21 and 4,06,952.62 in FY 19-20.
Unlike EPF, or Employees Provident Fund, NPS is not mandatory; instead, it is voluntary. The fund aims to create a sizable corpus for investors after their retirement. NPS accounts are of two types - Tier-1 accounts and Tier-2 accounts. This article elaborates on the definition and scope of NPS Tier-1, withdrawal limits, tax benefits, and the like.
What Is the National Pension Scheme Tier-1?
The National Pension Scheme Tier-1, a.k.a NPS Tier-1, is the first of the two account types investors can maintain with the National Pension System Trust. The following are the features that make NPS Tier-1 more unique than other investment schemes:
- It is a government-backed retirement-oriented investment scheme.
- Like other sovereign investment schemes like PPF, EPF, NSC (National Savings Certificate), SCSS (Senior Citizens Savings Scheme), etc., NPS Tier-1 is also covered by Section 80C of the Indian Income Tax Act 1961. Investors prefer investing in NPS Tier-1to save money for retirement and get tax benefits of up to INR 1,50,000 every financial year.
- Like EPF and PPF, NPS Tier-1 is an EEE instrument. The full form of EEE is Exempt-Exempt-Exempt. So, not only does NPS Tier-1 provide tax benefits at the time of investing, and the entire corpus and the withdrawal amount do not attract any tax.
- Investors can get 100% tax-free returns from NPS Tier-1. You can use the NPS Tier-1 calculator to get an estimate of the tax benefits.
- The Indian government introduced the National Pension Scheme (NPS) on 1st January 2004. The scheme was originally envisaged for government employees (except for armed forces personnel).
- In 2009, the government decided to extend the scope of the NPS to all Indian citizens between the ages of 18 and 60. Later, in 2019, the government further expanded the scope of NPS by allowing OCI and PIO card holders to open NPS Tier-1 accounts.
- In August 2021, the PFRDA increased the age of entry into the NPS from 65 to 70 years. So presently, any OCI (Overseas Citizen of India) and resident or non-resident Indian citizens can open an NPS Tier-1 account and defer it until they reach 75 years of age.
- NPS is managed and controlled by the PFRDA.
- PFRDA appointed Protean eGov Technologies Limited as the CRA (Central Recordkeeping Agency) for the NPS to smoothly implement this government-backed pension scheme.
- Besides preserving the records of subscribers, the CRA also cares for the administration and customer service of NPS subscribers. It is the CRA’s duty to assign a unique Permanent Retirement Account Number (PRAN) to all NPS Tier-1 subscribers and maintain the database of each PRA, besides recording the transactions in each PRA.
NPS Tier-1 refers to the most basic type of NPS account. Government employees invest a fixed part of their salary in the National Pension Scheme. The funds thus received are transferred to the empanelled Pension Fund (PF) managers for investing in earmarked equity and debt schemes. The different forms of NPS Tier-1 accounts are as follows:
- NPS (Central Government)
- NPS (State Government)
- NPS (Corporate)
- NPS (All Citizens)
The rules of NPS Tier-1 depend on the type of account. However, some rules are similar for all account types.
According to the Gazette Notification issued by the Department of Financial Services, Ministry of Finance, Govt. of India, on 31st January 2019, Central Government subscribers (later extended to all subscribers) can select the investment pattern and Pension Funds (PFs) in Tier-1 accounts.
So, if you have an NPS Tier-1 account, you can choose the investment option and pension fund of your liking. However, if an investor does not exercise the option, their NPS contributions will be automatically invested in the prevailing default schemes of the top-3 Pension Fund Managers (PFMs).
The top-3 Pension Fund Managers are SBI Pension Funds Pvt. Ltd., LIC Pension Fund Limited, and UTI Retirement Solutions Limited. The proportion of such investment will be as per the guidelines provided by the PFRDA and will be mentioned in the Statement of Transaction, or SoT.
NPS Tier-1 - Scheme Info
Under the National Pension Scheme Tier-1, subscribers can choose any of the following four investment schemes:
- Default Scheme - In this scheme, investments will be made in the default investment schemes of SBI Pension Funds Pvt. Ltd., LIC Pension Fund Limited, and UTI Retirement Solutions Limited in the proportion specified by the PFRDA.
- Scheme G - In this scheme, 100% of an investor’s contributions will be made in Government bonds and instruments related to bonds.
- Scheme LC 50 - This is a life cycle fund in which equity investments are capped at 50% of the net asset.
- Scheme LC 25 - This is a life cycle fund in which equity investments are capped at 25% of the net asset value.
NPS Tier-1 - The Top Features
NPS Tier-1 is the basic account needed to open an NPS Tier-2 account. So, any investor willing to invest in the National Pension Scheme to get guaranteed returns after retirement must open an NPS Tier-1 account first. The following are the salient features of this account:
- You can open an NPS Tier-1 account upon attaining the age of 18. However, you must continue depositing into the account until the age of 60, after which you can withdraw your investment plus returns. Also, you can defer the maturity by another 15 years until reaching 75 years of age.
- Investors may withdraw money from their NPS Tier-1 accounts in the case of financial emergencies like hospitalisation, wedding, education, etc.
- Investments up to INR 1,50,000 in a financial year are eligible for tax deductions under Section 80C of the Indian Income Tax Act 1961.
- An investor can open only one (1) NPS Tier-1 account.
- Investors may close their NPS Tier-1 account by fulfilling specific terms and conditions.
- Investors can benefit from online Aadhar-based eKYC functionality for the registration of subscribers through the e-NPS platform.
- Subscribers from the Government sector can onboard online through e-NPS.
- Subscribers can change their investment choice or asset allocation (shifting between Active Choice and Auto Choice or changing the allocation ratio) up to four times every financial year.
- NPS is a transparent investment instrument since subscribers can track their fund value and investment status whenever they want.
- The PRAN allotted to a subscriber is unique and remains valid irrespective of how often the subscriber switches employers or offices.
- NPS Tier-1 investment is 100% safe since it is actively monitored by the PFRDA, which comes under the Ministry of Finance, Govt. of India.
- Since the account maintenance charges of NPS Tier-1 are relatively lower than those of conventional mutual fund schemes, investors can earn extra income by investing in NPS. Moreover, the subscriber’s wealth enjoys compounded growth.
NPS Tier-1 - Pension Funds
The following Pension Funds act as the intermediaries of the National Pension Scheme (both Tier-1 and Tier-2):
- SBI Pension Funds Private Limited
- LIC Pension Fund Limited
- UTI Retirement Solutions Limited
- HDFC Pension Management Company Limited
- ICICI Prudential Pension Funds Management Company Limited
- Kotak Mahindra Pension Fund Limited
- Aditya Birla Sun Life Pension Management Limited
NPS Tier-1 - The Account Opening Process
You can open an NPS Tier-1 account either online or offline. The online mode is more convenient than the offline one. The following is the breakdown of each method of opening an NPS Tier-1 account.
- Visit your nearest Point of Presence - Service Provider (PoP-SP). PoP-SP refers to the network branch of NPS. The PoP-SP is empowered to accept, verify, and process NPS application forms. Any citizen between 18 and 65 can open an NPS Tier-1 account.
- Ask for the PRAN application form from the PoP-SP. You can also download the application form online from the NPS website.
- Fill out the application form by entering accurate details about your personal profile and scheme preferences. Remember to provide your signature, photograph, and KYC (Know Your Customer) documents.
- Submit your PRAN application form to the PoP-SP. You will receive your PRAN at your registered postal address from the CRA.
- You can also track your application status by quoting the receipt number of your PRAN form.
- After getting the PRAN card, deposit the first contribution amount and submit the slip to your PoP-SP.
- Visit the e-NPS’s official website. Any Indian citizen and Non-Resident Indian (NRI) between 18 and 70 can open an NPS Tier-1 account. You can also use e-NPS’s official website to make the initial and subsequent contributions to your NPS Tier-1 account.
- Before using the online registration system, ensure that you have an active mobile number, a valid email ID, and a bank account number with internet banking enabled.
- Click on ‘National Pension System’ and ‘Registration.’
- Under ‘New Registration,’ choose the appropriate options. You may register with ‘Aadhar online/ offline e-KYC,’ ‘Permanent Account Number (PAN),’ or ‘Document with DigiLocker.’ Also, select the applicant type, status of applicant, account type, and option, and enter your Aadhar number.
- After entering your Aadhar number, click on ‘Get OTP’ and enter the OTP in the appropriate box.
- After logging in, choose ‘Tier-1 account’ and select the fund manager.
- Select the ‘Auto’ or ‘Active’ mode.
- Provide nominee details and share.
- Upload the KYC documents, such as PAN card, Aadhar card, etc.
- Complete the registration by paying INR 500.
- Your PRAN will get generated and sent to you on your email ID.
NPS Tier-1 - Mandatory Investments
According to the guidelines laid out by the PFRDA, every subscriber must make the following payments in their NPS Tier-1 account:
- Initial Contribution - INR 500
- Subsequent Contribution (Monthly) - A minimum of INR 500
- Minimum Contribution (Yearly) - INR 1,000
- Minimum No. of Contribution (Yearly) - One (1)
It is good to note that there is no limit to the maximum investment in NPS Tier 1.
NPS Tier-1 - Withdrawal Norms
According to the PFRDA (Exits & Withdrawals under NPS) Regulations 2015, withdrawals are allowed under the following categories:
- Normal Superannuation - The subscriber must utilise 40% of the available funds to purchase an annuity that will be used to provide a monthly pension. The subscriber can withdraw the remaining 40% on superannuation. However, if the total amount in the subscriber’s NPS account is less than INR 5 lakh, they can withdraw the full amount.
- Death - If the subscriber dies, the subscriber’s spouse must utilise a minimum of 80% of the accumulated pension fund to purchase an annuity that will be used to provide a monthly pension to the subscriber’s spouse. The remaining 20% can be withdrawn by the subscriber’s nominee or legal heir. However, if the total amount in the subscriber’s NPS account is less than INR 5 lakh, they can withdraw the full amount.
- Premature Exit - If a subscriber decides to close their account prematurely, they have to utilise 80% of the accumulated pension fund to purchase an annuity that will be used to provide a monthly pension to the subscriber. The subscriber can withdraw the remaining 20%. However, if the total amount in the subscriber’s NPS account is less than INR 2.5 lakh on the resignation date, they can withdraw the full amount.
NPS Tier-1 - Tax Benefits
Investments in NPS Tier-1 make you eligible to get various tax benefits. Here is a breakdown of the tax benefits of NPS Tier-1:
- According to the Income Tax Act’s Section 80CCD(1), you can claim tax deductions of up to INR 1.5 lakh every financial year. The tax exemption will be a minimum of 10% of the subscriber’s total income or salary.
- Section 80CCD (1B) provides an extra tax deduction of up to INR 50,000. So, the actual tax benefits of NPS Tier-1 can go up to INR 2 lakh every financial year.
- Although the returns from NPS Tier-1 are exempt from taxes, the annuity received by subscribers is taxable.
- Salaried subscribers can get tax benefits of 10% of their basic salary and DA (Dearness Allowance) if their employer is a co-contributor to NPS Tier-1.
- The 60% pension fund a subscriber receives after the mandatory lock-in period is exempt from taxes.
- Any partial withdrawal from an NPS Tier-1 account is also exempt from taxes.
Frequently Asked Questions (FAQs)
What is NPS Tier-1?
NPS, or National Pension Scheme, refers to a government-backed retirement fund with various tax benefits. NPS Tier-1 is the basic account that must be mandatorily opened by everyone willing to be a part of the National Pension System.
Any Indian citizen (resident or non-resident), OCI (Overseas Citizen of India), or PIO (Person of Indian Origin) working in a public or private firm can open an NPS Tier-1 account.
What is the minimum and maximum investment amount in NPS Tier-1?
While the minimum initial contribution in NPS Tier-1 is INR 500, the subsequent contribution (monthly) is a minimum of INR 500, and the subsequent contribution (yearly) is a minimum of INR 500; there is no limit to the maximum investment in NPS Tier 1.
What are NPS Tier-1 tax benefits?
According to the Income Tax Act’s Section 80CCD(1), an investor can claim tax benefits of up to INR 1.5 lakh every financial year. The tax exemption is usually a minimum of 10% of the investor’s total income or salary.
Moreover, Section 80CCD (1B) provides an extra tax deduction of up to INR 50,000. So, the actual tax benefits of NPS Tier-1 can reach up to INR 2 lakh every financial year.
What are the rules for partial withdrawal from an NPS Tier-1 account?
To make premature withdrawals from an NPS Tier-1 account, the subscriber’s account must be at least three (3) years old, and the withdrawal amount must not exceed 25% of the total contributions.
Moreover, withdrawals are permitted only for marriage, hospitalisation, higher education, or house construction.