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Complete Guide to National Pension Scheme (NPS)

What is the National Pension Scheme?

The Government of India launched the National Pension Scheme for all government employees who joined after April 1, 2004, since it did not want to pay them defined benefits. While it was initially meant for Government employees, all citizens of India between the ages of 18 and 65 became eligible for the scheme in 2009.

The goal of this scheme was to cover all Indian citizens, including those working in the unorganized sector. The Pension Fund Regulatory and Development Authority, or PFRDA, is the body that regulates and administers NPS. The Act governing the National Pension Scheme is the PFRDA Act 2013. This is a voluntary defined contribution pension system.

Professional fund managers manage the funds that are invested in market-linked instruments. Individual subscribers contribute to the fund that keeps accumulating till retirement age. The investments under the NPS Scheme keep growing at market-linked rates depending on the fund chosen. There is an exit option for subscribers before reaching the superannuation age.

The subscriber cannot withdraw the entire funds; a portion of the funds is used to provide the subscriber with a monthly pension. An annuity policy is purchased with a minimum of 40% of the corpus accumulated under the NPS scheme for providing a lifetime pension to the subscriber. The remaining 60% can be commuted or claimed as a lump sum by the subscriber.

What are the Benefits of the National Pension Scheme?

Here are the different NPS tax benefits:

Benefits of Investing:

  • Subscribers are eligible for tax deductions on contributions up to INR 1,50,000 under Section 80CCD (1) of the IT Act, 1961.
  • Subscribers can also avail of an additional benefit of INR 50000 under Section 80CCD (1b). This makes NPS the only investment offering subscribers an annual tax deduction of INR 2,00,000.
  • Subscribers can also claim 10% (14% for government employees) of the employer contribution limited to the Basic and DA over and above the INR 2,00,000 annual tax deduction under 80CCD (2).

Benefits on Returns

  • There are no fixed investment returns since the funds are invested in market-linked products.
  • NPS returns are tax-free.

Benefits on Maturity

The maturity date for the National Pension Scheme is 60 years. Only 60% of the corpus on retirement can be withdrawn as a lump sum, of which 40% is tax-free, and 20% is taxable.

The remaining 40% will be used for buying an annuity policy. The returns from the annuity policy are taxable. If only 40% is withdrawn as lumpsum, no tax is payable on it. Subscribers only pay a tax for the income from the annuity policy.

What are the Different Types of Accounts Under NPS?

There are two types of accounts under NPS and their features:

NPS Tier 1 Account NPS Tier 2 Account
Status Compulsory Voluntary
Withdrawal Partial withdrawal is allowed if:

  1. Contributions have been made for at least 10 years
  2. A gap of 5 years is required between two withdrawals
  3. The limit is 25%

Three withdrawals are allowed in the ratio of 10%, 10%, and 5%

Allowed
Tax Deductions Up to INR 2 lakhs U/S 80 CCD (1) and 80 CCD (1b) of IT Act 1961 Exemption up to INR 1.5 lakhs for only central government employees. Two Tier 2 accounts need to be opened. The second Tier 2 account will have a 3-year lock-in period like an ELSS (Equity linked savings scheme) Mutual Fund
Minimum Amount The minimum amount per contribution is INR 500, and the annual contribution is INR 1000 The minimum amount per contribution is INR 250
Maximum Amount No limit No limit
Tax on Withdrawals No tax on partial withdrawals Taxable

On opening an NPS Tier 1 and Tier-2 account, the subscriber will be issued a PRAN or Permanent Retirement Account Number.

The following additional tax benefits are available for NPS Tier 1 contributions:

  • There is no tax up to 25% for withdrawals from NPS Tier 1
  • No tax is payable on the amount spent on purchasing the annuity
  • Lumpsum withdrawal of 40% of the NPS corpus at age 60 is tax-free.

Subscribers opting for the Tier 2 tax exemption need to remember the following:

  • The entire Tier 2 amount can be withdrawn.
  • Subscribers can withdraw from NPS.
  • 20% of the accumulated corpus can be withdrawn. It will be taxed at the subscriber's tax slab. An annuity has to be purchased with a balance of 80% of the corpus. This annuity will be taxable.
  • Tier 1 accounts can be withdrawn at the age of 60, and there will be no tax on the withdrawal.

How Can We Open an NPS Account?

To open an NPS account, we need to follow the steps mentioned below:

  • Log on to the eNPS portal.
  • Choose either 'Individual Subscriber' or 'Corporate Subscriber.'
  • Select either 'Citizen of India' or 'NRI' as the residential status.
  • Choose either a Tier-1 Account or both Tier-1 and Tier-2 accounts. For 80C benefits and long-term investments, Tier-1 is compulsory.
  • Provide your PAN details and PoP (Point of Presence) or Bank. Enter your current bank details where you have your savings and Demat account since the application will be processed faster.
  • Your PAN card and a canceled cheque should be uploaded. The size should be between 4KB and 2MB.
  • Scan and upload your passport-size photo and signature.
  • Make the required payment through net banking when you reach the payment gateway.
  • After payment, the Permanent Retirement Account Number is generated.

What are the Different Asset Classes for Investment in NPS?

Here are the NPS scheme details:

  • There are 4 classes of assets to choose from Equity (E), Corporate Bonds (C), Government Bonds (G), and Alternative Assets like REITs (Real Estate Investment Trusts).
  • There are two investment choices, Auto Choice and Active Choice.
  • Under Active Choice, you can choose the percentage allocation of each asset class in your portfolio. We can choose a maximum of 75% equity in your portfolio when we are under 50 years of age. When we reach age 60, the maximum we can contribute to equity is 50%. The subscriber has the option to change the asset allocation as well as the fund manager. However, there are certain restrictions on these changes.
  • Under Auto Choice, there are three portfolios. They are aggressive, conservative, and moderate. Aggressive has the highest equity allocation followed by moderate and then conservative. As your age group increases, allocation to equity decreases, and allocation to Government Bonds increases.

Here is the NPS asset allocation table (Auto Choice):

Aggressive Moderate Conservative
Age (in Years) E(%)    C(%)     G(%) E(%)    C(%)     G(%) E(%)    C(%)     G(%)
Up to 35 75         10         15 50        30         20 25         45         30
40 55         15        30 40        25         35 20         35         45
45 35         20        45 30        20         50 15         25          60
50 20         20        60 20        15          65 10          15          75
55 15         10         75 75         10         15 10         10          80
Asset Class E = Equity C = Corporate Bonds G = Government Bonds

What Returns Can We Expect From NPS?

The returns from National Pension Scheme will depend on the portfolio we choose and the fund manager's performance.

  • The conservative portfolio has a 75% exposure to Government Bonds and Corporate and a 25% exposure to equity leading to the lowest rate of return.
  • The moderate portfolio has a 50% exposure to Government Bonds and Corporate and a 50% exposure to equity leading to a moderate rate of return.
  • The aggressive portfolio has a 25% exposure to Government Bonds and Corporate and a 50% exposure to equity, leading to the highest rate of return.

The returns from different fund managers have varied from 7% to 12%, depending on the portfolio chosen. However, we need to remember that NPS returns are market linked, and there are no guarantees.

Who is Eligible for NPS?

The following categories of Indian citizens are eligible for National Pension Scheme:

Government Employees

All central and state government employees are eligible for NPS, with the exception of members of the armed forces. Government employees contribute 10% of their salary to the NPS scheme, and the Government contributes an equal amount. There is a contribution of 14% from the Central Government towards the NPS scheme.

Private Corporate Employees

Employees between the age of 18 and 60 are eligible for the National Pension Scheme provided the company fulfills the following criteria:

  • Registration under the Companies Act
  • Registered as a Society or Trust
  • Should be an LLP or partnership
  • Registered as per the different Cooperative Acts
  • Registration as a Sole Proprietorship
  • Formed by an order by the Central or State Government
  • Be a Central or State Public Sector Enterprise (PSU)

Employees of such companies qualify for the NPS Scheme.

Other Indian Citizens

Indian citizens who are not government employees or private sector employees can voluntarily apply for the National Pension Scheme if they fulfill the following conditions:

  • The age of the applicant should be between 18 and 60 years of age.
  • All the KYC requirements should be fulfilled as mentioned in the Subscriber Registration Form, and all required supporting documents need to be submitted.

What are the Goals of the National Pension Scheme?

The National Pension Scheme seeks to fulfill the following objectives:

  • Retirement Corpus: Individuals need a certain corpus depending on their expenses per financial planning calculations. With NPS benefits, retirees can meet all their post-retirement expenses.
  • Comfortable Retirement: Most individuals in India are worried about income post-retirement. With NPS, these hassles are no longer there.
  • Stress-Free Life of Senior Citizens: The Government has launched this scheme to address their concerns regarding old-age security.
  • Financial Discipline: The NPS Scheme allows subscribers to save and invest during their active years and ensure that their standard of living is not compromised post-retirement.

Process of NPS Scheme Log in

We can log in to our National Pension Scheme account online by following the steps mentioned below:

  1. To log in to your NPS account, you need to have your 12-digit PRAN (Permanent Retirement Account Number). PRAN can be obtained by providing the required documents to the PoP (Point of Presence) service provider or submitting them online at the NSDL website.
  2. Access the eNPS by clicking on the website.
  3. A new password must be created through the 'Generate/Reset password' option for those registering for the first time.
  4. Fill up the required details like PRAN and date of birth. After entering the captcha, click on 'login'.
  5. You will get an OTP (one-time password) on our registered mobile number. This password will be approved once the OTP is entered.
  6. Go to the home screen and enter the PRAN, password, and captcha for the login details. Click on the login button.
  7. You can see the home page of your account.

How Can We Make an Online NPS Application?

To apply for the National Pension Scheme, follow these steps:

  • Submission of documents to Point of Presence: An applicant who wants to open an online or offline NPS scheme needs to locate the nearest PoP (Point of Presence). A subscriber form will be provided, and we will have to submit the required KYC documents. The KYC steps can be ignored if our KYC is up-to-date with our bank.
  • Make a Contribution: We need to make an initial contribution of INR 250, INR 500, or INR 1000 annually, depending on the type of NPS account we are opening. For NPS Tier-1, an initial contribution of INR 500 or an annual contribution of INR 1000 will have to be made.
  • Issue of PRAN: When we make the initial contribution, the PoP will issue the PRAN or Permanent Retirement Account Number, a unique ID for all subscribers of the National Pension Scheme.
  • Welcome Kit: The PoP will issue a welcome kit to all first-time subscribers. The welcome kit includes the PRAN and your password. The welcome kit will require a one-time registration fee of INR 125.

What Pension Funds to Choose When Investing in NPS?

You have the choice of investing in NPS through the 8 fund managers mentioned here:

  1. Aditya Birla Sun Life Pension Management Ltd
  2. HDFC Pension Management Company Ltd
  3. ICICI Prudential Pension Funds Management Company Ltd
  4. Kotak Mahindra Pension Fund Ltd
  5. LIC Pension Fund Ltd
  6. Max Life Pension Fund Management Ltd
  7. SBI Pension Funds Private Ltd
  8. Tata Pension Management Ltd
  9. UTI Retirement Solutions Ltd

Before you choose a fund manager, you can check their past performance online. If you are not satisfied with the performance of the NPS fund manager, you can switch to another fund manager. You can make this switch only once a year.

Conclusion

The National Pension Scheme is an excellent retirement tool for ordinary citizens and employees of private sector companies and Government organizations. If you are between 18 and 60 years old, become a subscriber of NPS, and enjoy a stress-free retired life. Enroll now!

FAQs

What is the Minimum Contribution Required for Tier-1 and Tier-2 Accounts?

You need to make one contribution each year to keep your account active. If this requirement is not met, your NPS account may be frozen. Here are the minimum contribution requirements:

Contribution Requirements NPS Tier-1 NPS  Tier-2
On opening account INR. 500 INR 1000
Per Contribution INR 500 INR 250
Annual Contribution INR 1000 None
Contribution Frequency Per Year 1 1

What are the Rules for NPS Nomination?

We need to name our nominee at the time of registration for PRAN (Permanent Retirement Account Number) for the National Pension Scheme. This nomination, however, can be changed subsequently on request from the subscriber. This is a paid service, and we will have to pay INR 20 plus taxes for each request.

Are Partial Withdrawals Allowed in NPS?

Yes, partial withdrawals are allowed from the National Pension Scheme after 3 years of account opening. We can make only 3 withdrawals during the entire tenure of NPS. Withdrawals can be made for the following occasions:

  • Higher education for children
  • Treatment of illnesses
  • Life-threatening Accidents
  • Other Critical Illnesses

Are NRIs allowed to open an NPS account?

Yes, NRIs can open an NPS account provided they are Indian citizens

What do I do if I Have Problems With My NPS Account?

It depends on who your NPS account is registered with. If your account is registered with Karvy, you can contact customer care through email or phone. Contact their customer service department if your NPS account is with NSDL.

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