National Pension System (NPS) is a voluntary, defined contribution saving-cum-pension plan with mandatory annuity option which allows individuals to save funds in a fixed income plan for retirement along with an option to withdraw a corpus at the age of 60. While this national pension scheme was initially introduced for only government employees, it was opened up for all Indian citizens in 2009.
- The Basics of National Pension System
- Eligibility criteria for joining NPS
- Types of Accounts in NPS
- Defined Contribution of Pension Scheme
- Tax Benefits Under NPS Account
- Overview of Investment Options Under National Pension Scheme
- Option to Make a Partial Withdrawal in NPS Account
- Features of National pension Scheme
- Performance of NPS Account
- Who should invest in NPS Account?
- How to open an NPS Account Online?
The Basics of National Pension System
NPS is a voluntary contribution-based pension plan. That is, individuals can choose to make voluntary amount of contribution in the pension fund. The funds are managed by professional fund managers, which are regulated by Pension Fund Regulatory and Development Authority (PFRDA). The funds have diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and Shares.
Eligibility criteria for joining NPS
Individuals between the ages of 18 and 70 can join the scheme. The eligibility criteria for joining NPS are:
- Investors should be Indian citizens.
- Non-Resident Indians (NRIs) & Persons of Indian Origin (PIOs) can also join.
- The investor should comply by KYC norms and hold a valid PAN Card.
Types of Accounts in NPS
Difference between Tier I and Tier II accounts
There are two types of NPS accounts: Tier I and Tier II.
Tier I Account -
It is a mandatory pension account. As you opt for National Pension Plan, you basically open a Tier 1 NPS Account. This account has a lock-in period until the age of 60. Only partial withdrawals up to 25% of contributions are permitted in specific cases such as critical illnesses or higher education, and that too after 3 years of opening the NPS account. Tax benefits are available for contributions made towards this account under Section 80 CCD(1) and Sec 80 CCEof the Income Tax Act.
Tier II Account -
It is an optional NPS account that offers more liquidity than the Tier I account. The Tier II account does not have a lock-in period, and subscribers can withdraw money from the account as and when required. However, there are no tax benefits available for contributions made towards this account.
It is important to note that a subscriber must have a Tier I account to open a Tier II account. Additionally, the Tier II account does not qualify for tax benefits and the subscriber has complete flexibility to transfer Tier II funds for annuity/ monthly pension scheme.
Defined Contribution of Pension Scheme
After knowing what is NPS scheme, understand how it works. The minimum contribution to open an NPS account is Rs. 500 and the minimum annual contribution is Rs. 1,000. There is no maximum limit attached. However, the tax benefits are available only up to a maximum contribution of Rs. 2 lakh per annum. It is thus recommended to open a Tier II account for additional savings as you get complete liquidity. Both the subscriber and employer can contribute to the NPS account.
NPS contributions can be made through various modes such as electronic transfer, cheque, demand draft, and cash. The amount can be processed through:
- NPS website
- Visiting the designated banks and POPs
Tax Benefits Under NPS Account
There are additional tax benefits with NPS account:
Tax benefits under Section 80C :
NPS contributions up to Rs. 1.5 lakh are eligible for deduction under Section 80C of the Income Tax Act.
Additional tax benefits under Section 80CCD(1B) :
Contributions up to Rs. 50,000 are eligible for an additional tax deduction under Section 80CCD (1B) of the Income Tax Act.
Tax benefit on withdrawals :
On maturity, 60% of the corpus can be withdrawn as a lump sum, and the remaining 40% must be used to purchase an annuity. The lump sum withdrawal is tax-free, but the annuity income is taxable.
Overview of Investment Options Under National Pension Scheme
NPS offers 2 options to subscribers for allocating funds: (i) Active Choice or (ii) Auto Choice.
Active choice is for the pro investors who understand the markets and wish to manage their portfolio themselves. The investments can be made within 4 asset classes:
Equity (E) :
Maximum of 75% exposure to equity is allowed in NPS. This is ideal for investors who are open for high risk high return options.
Corporate Bonds (C) :
You can invest in corporate bonds which are fixed income bearing debt instruments.
Government Securities (G) :
Another safe investment option is government securities.
Alternate Assets (A) :
Maximum of 5 % funds, are invested in real estate and infrastructure funds as it is highly risky asset class.
In case of 'Auto Choice', the funds are allocated as per pre-defined proportion basis your age. Exposure to risky options reduces with progressing age. You can choose asset allocation as aggressive (75% equity), moderate (50% equity) or conservative (25% equity).
Option to Make a Partial Withdrawal in NPS Account
NPS offers several withdrawal options
Normal exit :
At the time subscribe turns 60 years s/he can withdraw up to 60% of the corpus as a lump sum. The remaining 40% must be used to purchase an annuity plan from a PFRDA-registered insurance company.
Early exit :
If the subscriber wants to exit the NPS account before the age of 60, they can withdraw up to 20% of the corpus as a lump sum. The remaining 80% must be used to purchase an annuity plan.
Partial withdrawal :
In case of financial emergencies, the subscriber can make partial withdrawals up to 25% of contribution, subject to 3 years of account opening. The withdrawals can be made for specific reasons such as children's education, marriage, and treatment of critical illness.
Death of subscriber :
In the unfortunate event of the subscriber's death, the nominee or legal heir can withdraw the entire corpus as a lump sum or purchase an annuity plan.
Exit from NPS due to other reasons :
In case the subscriber wants to exit the NPS before the age of 60 due to specific reasons like permanent disability or terminal illness, they can withdraw the entire corpus as a lump sum.
Features of National pension Scheme
Some more features of the National Pension System are :
The account is portable across employers and locations, making it easier for subscribers to continue investing in their retirement pension scheme even when they change jobs or locations.
Investment Options :
This NPS pension policy provides subscribers a choice to invest through eight pension funds. They can opt for two routes: Active and Auto choice. Under Active Choice, subscribers can choose their own asset allocation among four asset classes, which include equity, corporate bonds, government securities, and alternative investment funds. Under Auto Choice, the asset allocation is automatically determined based on the subscriber's age.
The subscriber can select up to three nominees and align percentage allocation for each nominee under this pension policy. Registered nominees can claim the corpus in the event of death of subscriber.
Access Account Online :
The subscriber can access NPS account online by entering PRAN number and password.
Annuity Options :
The National Pension System offers several annuity options such as life annuity, joint life annuity etc. for subscribers. You can opt for monthly pension scheme as per you needs.
Performance of NPS Account
The performance of your NPS account depends on the performance of the chosen pension funds. You should compare ROI from best performing pension plans. As NPS accounts are linked with markets, the yield depends on the stock market movements. We have seen impressive yields, with an average annual return of 9-10% over the past decade. NPS has outperformed other pension plans like PPF, EPF, and other fixed-income instruments and often considered as the best pension plan. However, your investments are not without market risks and thus it is advised to choose the fund allocation accordingly.
Who should invest in NPS Account?
Irrespective of your income level, you should contribute to NPS during your working life. Small steps today can help compound big benefits post retirement. Thus NPS is the best pension plan for:
- People who are 18 years of age & above and hold a PAN card can open an NPS account.
- Those who have a long-term investment horizon should opt for National Pension Plan Tier 1 & Tier 2 accounts as funds are invested in professionally managed pension funds. You can withdraw 60% of fund tax free at retirement and enjoy withdrawal flexibility with Tier 2 account.
- NPS is ideal investment opportunity for people with moderate to low-risk. You get substantial diversification option.
In conclusion, what is national pension system? National pension system is a market linked saving cum investment option in professional managed funds for a fixed retirement income.
How to open an NPS Account Online?
To open an NPS account, follow these steps:
- Visit official website of NPS or a POP service provider
- Fill in the registration form. Share your personal details such as name, address, contact information & more as required.
- Choose active or passive investment option and choose the pension fund manager (PFM).
- Select the mode of contribution and frequency of payments.
- Submit the application form along with identity proof, address proof, and a photograph. The documents required will include:
- Aadhaar card
- PAN card
- Bank account details
- Address proof such as passport, voter ID, or driving license.
- Pay the initial contribution amount of Rs. 500 to activate NPS account.
- You will receive a Permanent Retirement Account Number (PRAN) and a password to access your account.
As you have learned about what is NPS scheme and benefits, it is time you compare best pension plans and make an informed decision.