What is NPS (National Pension Scheme)?
The National Pension Scheme (NPS) is a Government launched scheme for the purpose of social security. NPS account take savings from your monthly income. This scheme encourages people to deposit in the NPS account on the regular intervals till their retirement.
After the retirement, subscribers are open to withdraw lump sum amount or part of it. Therefore, through this scheme an individual still can have regular income on monthly basis after retirement. The pension scheme is administered on behalf of the government by the Pension Fund Regulatory and Development Authority India.
Who can invest in NPS account?
Any Indian citizen between the age of 18-60 can freely avail this scheme. An NRI person can also invest in this scheme until they hold the Indian citizenship. If there is any change in citizenship status then account of that person will be closed. NPS Account have to be mandatorily closed on reaching the age of 70 years.
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Where (in which asset classes) money will get invested in NPS?
Following are the assets classes available for investment under NPS:
- Equity or E- A ‘high return-high risk’ fund that invests predominantly in equity market instruments.
- Corporate Debt or C – A ‘medium return-medium risk’ fund that invests predominantly in fixed income bearing instruments.
- Government Securities or G – A ‘low return-low risk’ fund that invests purely in Government Securities.
- Alternative Investment Funds or A –In this asset class, investments are being made in instruments like CMBS, MBS, REITS, AIFs, etc.
If you are a conservative investor, you can choose to invest your entire pension wealth in C or G asset class. However, if you want to have exposure to equity, you can allocate maximum 50% of your money to asset class ‘E’ or up to 5% in Alternative Investment Funds.
What are the different Types of NPS Account?
There are two types of account under NPS scheme which are Tier-I & Tier-II. The tier-I is the default account while the tier-II is a voluntary account. Difference of both accounts are given below:
| Particulars | NPS Tier-I Account | NPS Tier-II Account |
| Status | Default | Voluntary |
| Withdrawals | Not permitted | Permitted |
| Tax exemption | Up to Rs 2 lakh p.a. | None |
| Minimum contribution | Rs 500 or Rs 1,000 p.a. | Rs 250 |
| Maximum contribution | No limit | No limit |
Every person who opt for NPS scheme have to maintain Tier-I account. On maturity i.e at the age of 60, 60% of the corpus which is tax-free can be withdrawn. Another 40% must mandatorily be used to buy an annuity.
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The NPS account holder has two option for investment-
- Active choice: Under active choice, subscriber decides the scheme and the type of split.
- Auto choice: Under auto choice, depending on the subscriber’s age, the option is selected for the risks of the investment.
What are the Benefits of National Pension scheme?
- Returns : NPS returns are much higher than traditional mode of savings like Fixed Deposit, PPF etc. They are related to equities exposure. NPS account can provide great return on the amount deposited which can be 8%-10% p.a. returns.
- Risk : Although it relates to the market volatility. However, NPS was launched by government so it is less risky.
- Tax efficiency : NPS in India works on EET model i.e. exempt at the time of Investment, Exempt on Appreciation and Taxable on Withdrawal. There is 10% Deduction of salary available on the contribution of employee under section 80CCD maximum upto 1.5 lakhs. Also an additional deduction can be claimed under section 80CCD(1B) of Income tax Act, 1961 upto Rs 50000 by employee.
- Option to change scheme and fund manager : With NPS, one has the provision to change the pension scheme or the fund manager if you are not happy with their performance.
How to open NPS account?
NPS account can be open by both the means: offline as well as online.
Offline mode
- The offline process of opening a NPS account is first, you will have to find a PoP (Point of Presence), (it could be a bank too).
- Collect a subscriber form from your nearest PoP and submit it along with the KYC papers. If you have already done your KYC with then ignore it.
- Once you make the initial investment (not less than Rs. 500 or Rs. 250 monthly or Rs. 1,000 annually), the PoP will send you a PRAN – Permanent Retirement Account Number.
- This number and the password in your sealed welcome kit will help you operate your account.
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Online mode
- By online process you can open your NPS account within half hour.
- Opening an account online (enps.nsdl.com) is easy, if you link your account to your PAN, Aadhaar and/or mobile number.
- You can validate the registration using the OTP sent to your mobile.
- This will generate a PRAN (Permanent Retirement Account Number), which you can use to operate your account.
Comparison of NPS scheme with other type of investments
There are also other options available to taxpayer for investment for the purpose of tax saving under Section 80C are Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD). Here is the quick comparison of NPS with other tax saving-
| Investment | Interest | Lock-in period | Risk Profile |
| NPS | 8% to 10% (expected) | Till retirement | Market-related risks |
| ELSS | 12% to 15% (expected) | 3 years | Market-related risks |
| PPF | 8.1% (guaranteed) | 15 years | Risk-free |
| FD | 7% to 9% (guaranteed) | 5 years | Risk-free |
The NPS can earn higher returns than the PPF or FDs, but it is not as tax-efficient upon maturity. Partial withdrawals up to 25% of your contributions can be made from the NPS after three years of account opening but for specific purposes like home buying, children’s education, serious illness or some other prescribed purposes..
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How will be the Withdrawal from NPS?
a. If you Retire Before Age of 60:
Minimum 75% of fund shall be invested in purchasing an Annuity Plan and the rest lump sum amount of 25 % can be withdrawn.
b. If you Retire on or after Age of 60 :
Minimum 40% of the fund shall be invested in purchasing Annuity Plan and the rest 60% can be withdrawn.
Note: Contribution towards Annuity is Not Taxable, but any other amount withdrawn is Taxable. Such contribution towards Annuity Plan is Taxable under the head Income from Other Source on Maturity. For any questions, you may reach us at-
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The author of above article is Shruti Jain.
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