National Pension Scheme or NPS is a long-term investment scheme that is meant to secure your financial future. This is a voluntary scheme and not compulsory for anybody to join. It will give you a monthly pension payout for your post-retirement needs.
Moreover, it is a tax-saving investment plan as well. The amount you contribute towards your NPS accounts is exempted from tax up to a maximum of INR 1.5 lakh per annum. So, the NPS scheme not only helps you to build wealth for your retirement life but also helps you save taxes.
A piece of great news is that NPS is now also available for the private sector and self-employed individuals. So, if you are someone who wants to invest in NPS and is looking for a guide, then you are in the right place. This article will tell every little detail about NPS. From benefits to top NPS plans to even comparison, we got you covered.
What is the National Pension System or NPS scheme?
National Pension Scheme is a type of pension scheme for all Indian citizens. It invests the sum contributed by all its customers into several market-linked instruments like debts, equities, and so on. After the subscriber retires, they can receive the assured sum as a monthly pension.
How does the National Pension System work?
The NPS involves a pension account where you need to invest periodically as long as you are employed from when you subscribe to the plan. Now, after you attain the age of retirement, you can withdraw a specific amount of the corpus. And then, you will receive the remnant amount in your NPS as a monthly pension.
Earlier, this scheme would cover Central Government employees only. But, now, the PFRDA has modified it to be available for all Indian citizens. This is greatly beneficial for people working in the private sector because it allows them to get a regular pension after their retirement. It also comes with tax exemptions under Section 80C and Section 80CCD.
Types of NPS Accounts
1. NPS Tier 1 Account
This account gives you a tax deduction of up to INR 1.5 lakhs p.a. under Section 80C in addition to a sum of INR 50,000 p.a. under Section 80CCD. This is a permanent retirement account. You can only withdraw 60% of the corpus when you reach the age of 60.
The rest 40% needs to be used to buy an annuity. As per the Union Budget 2019 guidelines, the withdrawn corpus shall be exempted from tax from FY 2020 to 21. This makes the NPS scheme as good as other tax-saving schemes such as PPF and EPF.
2. NPS Tier 2 Account
The Tier 2 NPS Account is a voluntary account that you can open only if you already own an NPS Tier 1 account. Here, the subscribers are allowed to withdraw and invest their funds whenever they want to. It won’t attract taxes for both private-sector employees and self-employed individuals.
As per the announcements of the Union Budget 2019, from the FY 2020 to 21, you can claim tax benefits on the NPS Tier 2 accounts provided a lock-in period is there. So, this account has now become comparable to Equity Linked Savings Schemes (ELSS).
Who should consider investing in NPS?
The NPS is a pretty good investment plan for all those people who want to receive a monthly pension after retirement. It is a sort of planning for your retirement and doesn’t really involve any risk.
It’s a blessing for people working in the private sector. This kind of systematic investment makes you financially disciplined and secures your future too. Also, it will help you get the most out of the tax benefits under the 80C and 80CCD Section of the IT Act.
Features of the NPS scheme
- 60% of the maturity amount of NPS is taxable while the remaining 40% is not
- You need to use at least 40% of the amount to buy an annuity. The amount is exempted from tax.
- The withdrawn sum is taxable.
- If you withdraw 40% of the corpus and buy the annuity with the remaining 60%, then your entire corpus will be exempted from taxes.
- Your pension earned from the annuity will be taxed as per your income slab.
- The total tax exemption has been raised to INR 2 lakhs per year under Section 80C of the Income Tax Act.
What are the Asset Classes of NPS?
The National Pension System consists of 4 asset classes where you could invest in. These are as follows:
Class E: Invests in Equity
Class C: Invests in Corporate Bonds
Class G: Invests in Government Bonds
Class A: Invests in an alternative form of assets such as REITs & InVITs
If you pick the Active asset allocation choice, then you can choose your own assets. Otherwise, under the other option, i.e. Auto Choice, the assets get allocated by a professional fund manager. It is recommended to select the Active Choice only if you have good knowledge about market-linked assets.
Benefits / Advantages of Having an NPS Account
NPS also allows people to partially withdraw the corpus they have contributed towards their NPS accounts. This can help you greatly in times of emergencies.
· Small Investment
You can open the Tier 1 account of NPS with a minimum deposit of INR 500. And you only need INR 250 to open a Tier 2 NPS account. So, you see getting an NPS account is feasible and affordable for every member of society.
NPS is available in two investment options and thus, you can be flexible with your choices. You can also change your fund manager and switch several other investment options, provided, you follow the constraints associated.
· Auto Management
The auto choice is the default option for the subscribers of the NPS system. This option allows an appointed fund manager to manage your investments according to the fund manager according to the age of the investor.
· Active Management
If you choose this option, then you will receive the freedom to select the asset classes yourself. You will also be able to allocate various percentages of the investment funds with a maximum limit of 50% for the Asset Class E or Equities.
· NPS Withdrawal
The NPS scheme also allows you to withdraw your contributions partially. This is highly beneficial in situations of financial emergency. However, the NPS withdrawals are subjected to certain rules:
There must be a contribution of at least 10 years made if you want to avail of the partial withdrawal facility. Moreover, there should be at least a gap of 5 years between 2 consecutive withdrawals.
· Tax Benefits of NPS
The contributions you make towards your NPS account are eligible for Income Tax benefits under the sections given below:
|Applicable Sections for tax benefits under the IT Act 1961||Tax Benefits Provided|
|80CCD (1)||On the tax-deductible on the contributions towards the Tier 1 investments up to a maximum of INR 1.5 lakhs p.a.|
|80CCD 1 (B)||In addition to the above deduction, an extra INR 50,000 is allowed as well on contributions towards Tier 1 investments.|
|80CCD (2)||Contribution towards Tier 1 investments are eligible for up to 14% for Central Government contributions and 10% for other contributions. This is applicable over and above the deduction limit of 80C.|
Top 11 Best Top Performing NPS Schemes
|Sl. No.||NPS Scheme name||NAV||1-year return (%)||3-year return (%)||5-year return (%)|
|1.||SBI Pension Fund – Scheme A – Tier I||14.76||15.61||10.14||N/A|
|2.||HDFC Pension Fund Scheme G – Tier II||21.33||14.73||11.34||10.69|
|3.||LIC Pension Fund Scheme G – Tier I||22.90||14||12.10||11.60|
|4.||LIC Pension Fund – Scheme C – Tier II||20.06||15.23||10.46||10.24|
|5.||LIC Pension Fund Scheme G – Tier I||23.22||13.30||12.80||11.70|
|6.||SBI Pension Fund Scheme G – Tier I||30.77||13.60||11.00||10.60|
|7.||Birla Sun Life Pension Scheme G – Tier I||14.16||13.50||10.90||10.40|
|8.||Birla Sun Life Pension Scheme C – Tier I||14.43||12.60||10.20||N/A|
|9.||UTI Retirement Solutions Pension Fund Scheme G – Tier I||27.51||12.90||10.50||10.10|
|10.||ICICI Prudential Pension Fund Scheme G – Tier I||28.45||13.50||10.90||10.40|
|11.||Kotak Pension Fund Scheme G – Tier I||28.32||13.40||10.90||10.60|
NPS Eligibility Criteria
The eligibility of a person for the NPS scheme depends on the NPS model they want to register under. Find the details given below:
1. Government Sector NPS Model
This NPS system is applicable for all government employees, both central and state, but not for the employees of the armed forces.
In this model, 10% of the government employee’s salary will go to the NPS account with an equal amount of NPS contribution from the government. The employees of the Central Government will receive a contribution of 14% from the government.
Note: All the states in India have already implemented this scheme save West Bengal
2. Corporate Model of NPS
The corporate model states that corporate employees can make use of the benefits of the pension system as well. For this, they must be Citizens of India aged between 18 to 60 years and fulfil all the KYC requirements. This model applies to the following entities:
- People registered under the Companies Act
- People registered under the Co-Operative Acts
- People identified as Central or Public Sector Enterprises
- Identified as proprietary concerns
- Registered as LLPs or partnership firms
- Identified as a trust or society
- Incorporated vide order via State or Central Government
- The citizen models are also applicable
Also, the citizens of India should meet the following criteria for enrollment in the NPS scheme:
- Should be aged between 18 to 60 years of age
- Should have fulfilled the KYC requirements and submitted all necessary documents
Document Required for NPS Application
Given below are the documents you need to apply for an NPS account:
- Duly filled in the NPS application form (obtained from POP)
- KYC documents
- Copy of ID proof and residence proof: Aadhaar Card, Voter ID, Utility Bills, Ration Card, Driving License, etc.
How to open an NPS scheme account?
An NPS account can be opened in both online and offline mode. For opening an NPS account in the online mode, you need to visit any of the two portals of the Central Record Keeping Agencies (CRAs). These are enps.nsdl.com and enps.kfintech.com. After visiting the website, you need to follow the steps given below to open an NPS account:
- Click the ‘Registration’ option and then choose the ‘register with Aadhaar’ option.
- Type in the Aadhaar Number and then click on the ‘Generate OTP’ option
- You will receive the OTP on your registered mobile number.
- Now, enter the OTP and your personal details along with your nomination and bank details.
- Also, upload your photograph and signature. For this, click on ‘e-signature’ and again an OTP will be generated.
- You’ll receive the OTP on your mobile number and verify the signature. Now, make the payment. (You can start with INR 500 or INR 250 monthly/ INR 1000 annually)
- You will receive a PRAN from the PoP along with your account password. A registration fee of INR 125 needs to be paid for this.
Now, if you want to open an NPS account offline, then go to the nearest NPS PoP (Point-of-Presence) that is a designated bank branch. You will receive the entire list of NPS PoPs there which are registered under the registration form.
You will get the NPS form from the POPs. Fill in your basic details in the application form and provide other details like KYC documents such as Aadhar Card, Address Proof, PAN Card, and so on. Other services like changing fund managers can also be carried out at these POPs.
The PFRDA intermediaries include the following:
- Trustee banks
- NPS trust
- Points of Presence (PoP)
- Annuity Service Providers
- Central Recordkeeping Agency (CRA)
How to Register for the National Pensions Scheme
NPS registration can be done by following the given steps:
Step 1: Visit the eNPS portal from the official website of the NPS
Step 2: Choose what kind of subscriber you are from the options ‘Individual Subscriber’ and ‘Corporate Subscriber’.
Step 3: Now, choose your residential status. The options are ‘Citizen of India’ and ‘NRI’.
Step 4: Choose the account type you want. The options include Tier 1 or both account types since you need to have a Tier 1 account to have the Tier 2 account.
Step 5: Type in your PAN card details.
Step 6: Select a proper bank or PoP for your NSP. If you already are associated with a bank for your savings account or anything as such, then it’s better to choose it.
Step 7: Upload a copy of your scanned PAN card and a canceled Cheque. Also, upload your photo and signature.
Step 8: Now, you shall be redirected to the payment gateway. Make the payment via net banking, or any other online banking method.
Step 9: Once the payment is finished, your PRAN (Permanent Retirement Account Number) will be generated.
NRIs need to complete a few extra steps in addition to the above. These are given below:
- Select the status of your bank account: repatriable or non-repatriable
- Provide the NRO or NRE bank account details and a scanned copy of your passport
- Enter proper communication access: permanent or overseas address. If you choose to provide an overseas address, then you will have to pay additional charges.
After you are allotted your PRAN, you need to authenticate it by any of the following steps given below:
- E-Sign option (Service charges applicable)
- You need to verify with an OTP sent to your mobile number registered with your Aadhaar card.
- After that, the NPS registration form will be successfully signed.
- Via Print and Courier
- Select the Print & Courier option on the initial page
- Now, print out the form available on this page, paste photo, and sign in the dedicated signature block.
- Now, send the form to the Central Recordkeeping Agency within 30 days of PRAN allocation. Otherwise, your PRAN will be frozen temporarily.
NPS Investment Amount
- Minimum Amount required to invest in NPS Tier 1: INR 500 per month
- Minimum Annual Contribution to the NPS Tier 1: INR 1000
- There is no maximum limit to your NPS contribution under the Tier 1 account.
- Minimum Amount required to invest in NPS Tier 2: INR 250 per month
- Tier 2 accounts don’t have any maximum or specific annual contribution requirements.
NPS Charges and Fee
NPS is one of the cheapest investment options. Given below are the charges levied on your NPS investment:
- Pension Fund Manager Fees: 0.01% (maximum)
- Central Record-Keeping Agency:
- Account Opening Charges: NSDL = INR 40, Karvy = INR 39.36
- Annual Maintenance Cost per account: NSDL = INR 95, Karvy = INR 57.63
- Charge per transaction: NSDL = INR 3.75, Karvy = INR 3.36
- Point-Of-Presence (POP):
- NPS registration and upload of NPS contribution = INR 125
- Subsequent Transactions = 0.25% of contribution (min. : INR 20, max. : INR 25,000)
- Asset Servicing Charges = 0.032% p.a.
- Investment Management Fee = 0.01% p.a.
- Reimbursement of Expenses = 0.005% p.a.
- For changes = INR 20 per transaction
- Persistency charge = INR 50 p.a.
Rules for NPS Withdrawal
Given below are some of the rules levied on NPS withdrawals:
- You are allowed to have 3 partial withdrawals during the entire tenure of your NPS account
- Your first withdrawal can be made only after 3 years from the time you have opened your account
- The partial withdrawals are exempted from taxes.
- The total maximum amount withdrawn via partial withdrawals is 25% of the NPS contribution
How to check NPS balance online?
Follow the steps given below to check your NPS balance online:
- Go to the NPS login portal on the NSDL webpage
- Now enter the PRAN as your User ID along with your password to login to your account.
- Click on “Transaction Statement”
- You will find your NPS statement. You can download it and your Transaction statement as well.
How much pension will you get in the NPS?
The pension amount you ought to receive from your NPS depends on a lot of factors. Firstly, the performance of the NPS funds. You know that the amount you contribute towards your NPS account gets invested in several kinds of assets namely equity, debts, etc.
These assets in turn earn returns and make your corpus grow over time. Now, after you retire, you can choose to buy an annuity with the corpus you have amassed. This annuity will now serve as your monthly pension.
For instance, if you have accumulated a corpus of INR 1.5 crores and if the current annuity rate is 8% p.a. Then you will receive an annual pension of INR 12 lakhs which rounds to INR 1,00,000 per month. So, it is clear that your monthly pension will depend on the NPS corpus size and the annuity rate.
NPS Return Calculator
National Pension Scheme Calculator is an online tool used to get an idea of your maturity corpus that you will receive after you attain the age of retirement. You just need to fill in the following fields:
- DOB: This input will calculate the current age and give you an idea of how many years you need to stay in the NPS scheme.
- NPS Contribution: Could be annual, quarterly, monthly, bi-annual, etc.
- Expected return rate: Calculates the future value of your NPS corpus
- Annuity purchase: This is the expected percentage of your NPS corpus that you will use to buy annuities to determine your monthly pension after retirement.
- Annuity rate: The expected rate at which your annuities will grow (high annuity rate = higher pension)
Once done, the NPS pension Calculator estimated monthly pension figure and potential final corpus. Moreover, the NPS Return Calculator will also give you a detailed breakup of the payout and the annuity corpus.
Note: The results of the NPS Calculator are certainly subject to market-linked risks. The calculator can only give you an estimation based on the inputs you provide. The actual corpus growth might not exactly match the estimated figure you get. Also, the growth of annuity is market-linked so the estimated figure could be different from the actual corpus payout you receive.
NPS Vs Other Tax Saving Instruments
|Sl. No.||Investment||Lock-in period||Risks||Interest Rate|
|1.||NPS||Till Retirement||Market-dependent risks||8% to 10%|
|2.||ELSS||3 years||Market-dependent risks||12% to 15%|
|4.||FD||5 years||Risk-free||7% to 9%|
NPS Vs Tax Saving Mutual Funds (ELSS)
|1.||Lock-in period||Up to your retirement (i.e. till you attain 60 years of age)||3 years|
|2.||Min. Investment Amount||INR 500 (initially)||INR 500 (SIP or Lumpsum)|
|3.||Tax Benefits||Up to INR 1.5 Lakhs under Section 80C + INR 50,000 p.a under the Section 80CCD (1B)||INR 1.5 lakh p.a under the Section 80C|
|4.||Asset Allocation||50% equities in govt. securities||Equity|
|5.||Premature Withdrawals||Can withdraw partially||Can’t withdraw before tenure completion|
|6.||Taxability||Partially taxable||LTCG if maturity amount exceeds INR 1 lakh,|
Difference between NPS and EPF
|1.||Nature||Voluntary scheme||Mandatory for all employees earning more than INR 15,000|
|2.||Returns||8% to 8.7% p.a. (approx.)||10% to 14% (depends on the market)|
|3.||Minimum Investment Amount||· INR 500 per month for Tier 1
· INR 250 per month for Tier 2
|12% of the salary every month|
|4.||Withdrawal||60% of the sum can be withdrawn once you attain the age of retirement||100% of the maturity amount can be withdrawn after you attain 58 years of age.|
|5.||Tax exemption||60% of the matured amount is tax-free||The interest and the accumulated sum both are tax exempt|
|6.||Tax deduction on the payments||· Tax deduction up to INR 1.5 lakhs as per Section 80CCD (1)
· Additional tax deduction of INR 50,000 as per Section 80CCD (2)
|Tax deduction up to INR 1.5 lakhs p.a. according to the Section 80C|
Q1. Who is eligible to invest in NPS?
All Indian citizens aged from 18 to 60 and complying with the requirements of KYC can invest in an NPS. They also need to qualify for either of the two NPS models.
Q2. Can an NRI open an NPS account?
Yes, a Non-Resident Indian can open an NPS account to save for their retirement. But, the NRI individual should have the same residential status for the entire tenure of the plan.
Q3. Can I have more than one NPS?
The NPS scheme has a unique PRAN for every person registered with it. So, an individual cannot have multiple NPS accounts.
Q4. Is NPS is a good investment?
Ans. Yes, NPS is a pretty good investment. Though the decision and perception might vary from one person to another. Not everyone receives a pension after their retirement, so this is a great opportunity for employees of the private sector.
Q5. Why do you need to save for retirement?
Ans. You need to start saving for your retirement to secure your future financially. People retire around the age of 60 after which they don’t receive their salaries. Hence, they need to depend on their savings.
Also, inflation will increase the future cost of living. So, the sooner you start saving for your retirement, the better it is and NPS is a good option to try out.
Q6. How do I allocate the asset classes to my NPS funds?
Asset allocation depends on your risk appetite. If you are not too sure about asset division, just choose an NPS lifecycle fund. These can automatically carry out your asset allocation as per your age. These would also rebalance the assets every year.
Q7. Can I withdraw my NPS if I get laid off of my job?
No, you cannot. You can only carry out partial withdrawals that will amount to 25% of your contributions. This could be for certain urgent reasons such as education, marriage, etc. However, unemployment is not a valid reason for partial withdrawal.
Q8. How is the NPS annuity income taxed?
The annuity income falls under the EEE section. This means that your returns from the annuity you purchased with the NPS corpus are exempted from taxes. The investment amount, NPS returns, maturity corpus, everything under the EEE category is completely free of taxes.
Q9. How is my money invested in NPS?
Ans. Your money is invested in several different asset classes based on the plan you choose and your age. The asset classes are Equity, Govt. bonds, corporate bonds, and AIFs.
Q10. What is the lock-in tenure of an NPS?
Ans. An NPS account stays locked-in until you retire, or reach the age of 60. Then, you will start receiving the monthly pension payouts. However, you can opt for a pre-mature exit after completion of 10 years of contribution towards the NPS.
We have reached the end of this informative article about NPS. Investing in NPS is a pretty good way of future-proofing your life. Still, you should check the benefits of NPS mentioned above and everything else about it goes in line with your risk appetite, and goals. And in case you decide to invest in NPS, we have elaborately explained about the application procedure in this article itself.
Hope this serves to the best of your interest. If yes, then share it with others as well!