The National Pension Scheme is a government-sponsored retirement savings plan introduced in India in 2004. It provides a structured approach for individuals to build a retirement fund by making regular contributions. Managed by the Pension Fund Regulatory and Development Authority (PFRDA), NPS offers diverse investment options and allows subscribers to select their pension fund managers. With tax benefits and withdrawal flexibility, NPS has become a favored choice for long-term financial planning, catering to both employed and self-employed individuals.
About NPS
The Central Government introduced National Pension Scheme to provide individuals with a pension income to support their retirement needs. The Pension Fund Regulatory and Development Authority (PFRDA) oversees and manages National Pension Scheme operations in accordance with the PFRDA Act of 2013. NPS is a market-linked retirement savings scheme, offering simplicity, flexibility, and portability. It’s a tax-efficient method to enhance retirement income, allowing systematic savings for a financially secure future.
Key Features of the National Pension Scheme (NPS)
Individuals aged between 18 and 60, including both Indians and NRIs, have the option to open an National Pension Scheme account, with the exception of HUFs. Regardless of employment status or business ownership, anyone can invest in NPS, which is overseen by the Pension Fund Regulatory and Development Authority (PFRDA) in India.
How to open National Pension Scheme Account
Offline – National Pension Scheme accounts can be opened offline through various channels including banks, post offices, and financial institutions
Online – For online account opening, individuals can open accounts through authorized channels such as the NPS website, designated banking portals.
Click here to know more about the steps to join NPS online Through eNPS
Types of National Pension Scheme Account
National Pension Scheme is structured into two tiers
| Tier – 1 | Tier – 2 |
| This serves as your permanent retirement account, where regular contributions from both the subscriber and/or their employer are credited and invested according to the chosen scheme/fund manager | This is a withdrawable account that is optional and voluntary, accessible only if you have an active Tier I account. Withdrawals from this account are permitted whenever needed |
| Individual Pension Account | Optional Account and requires an active Tier-I Account |
| Withdrawal as per Exit & Withdrawal rules and regulations | Unrestricted withdrawals |
| Minimum contribution to open is Rs.500/- | Min. Contribution to open is Rs.250/- |
| Min. Contribution per year is Rs.1000/- | There’s no restriction on min. Contribution per year |
| AMC charges applicable | No separate AMC charges applicable |
| – | Anytime switching to Tier-I allowed |
Asset Classes
There are four asset classes from which the allocation is to be specified under a single Pension Fund Manager (PFM)
Asset Class E – Equity and related instruments
Asset Class C – Corporate debt and related instruments
Asset Class G – Government Bonds and related instruments
Asset Class A – Alternative Investment Funds including instruments like CMBS (Commercial Mortgage-Backed Securities), MBS (Mortgage-Backed Securities), REITS (Real Estate Investment Trusts), AIFs (Alternative Investment Funds), Invlts etc
While choosing the asset class, subscribers must note that
Percentage contribution value cannot exceed 5% for Alternative Investment Funds
The total allocation across E, C, G and A asset classes must be equal to 100%.
For Tier-II, you can allocate 100% to Equity.
For Tier-I, you can allocate 75% to Equity.
You need to choose the asset classes as well Pension Fund Manager (PFM) along with the percentage allocation are each asset class.
Investment Choices
Active Choice
Active Choice in National Pension Scheme enables subscribers to actively manage their pension investments by selecting from various asset classes such as equity, corporate bonds, government securities, and alternative assets. This option offers flexibility and control, allowing individuals to align their investment strategy with their risk tolerance and financial objectives.
| Asset Class | Maximum allocation of investment in the asset class |
| E | Up to 75% |
| C | Up to 100% |
| G | Up to 100% |
| A | Up to 5% Note: Investment in Asset Class A is available only for NPS Tier 1 account. |
Auto Choice
Auto Choice in National Pension Scheme automatically diversifies contributions across asset classes according to the subscriber’s age, transitioning from high-risk to low-risk investments over time. This passive strategy simplifies investment decisions, catering to individuals who seek a hands-off approach aligned with their age and risk tolerance.
Under Auto Choice, as you age, your exposure to Equity and Corporate Debt decreases. There are three different options available within ‘Auto Choice’ – Conservative, Moderate & Aggressive.
1. Conservative Life Cycle Fund – As the name suggests, it takes a conservative approach to investing with maximum equity allocation capped at 25%.
2. Moderate Life Cycle Fund – It is the default option, which caps the equity exposure to maximum of 50%.
3. Aggressive Life Cycle Fund – In this option, maximum equity allocation can go up to 75%.
| Particulars | Asset Class % | ||||||||
| Conservative Life Cycle Fund | Moderate Life Cycle Fund | Aggressive Life Cycle Fund | |||||||
| Age | E | C | G | E | C | G | E | C | G |
| Up to 35 years | 25 | 45 | 30 | 50 | 30 | 20 | 75 | 10 | 15 |
| 40 Years | 20 | 35 | 45 | 40 | 25 | 35 | 55 | 15 | 30 |
| 45 Years | 15 | 25 | 60 | 30 | 20 | 50 | 35 | 20 | 45 |
| 50 Years | 10 | 15 | 75 | 20 | 15 | 65 | 20 | 20 | 60 |
| 55 Years & Above | 5 | 5 | 90 | 10 | 10 | 80 | 15 | 10 | 75 |
No scheme of National Pension Scheme offers guaranteed returns or interest. The money of subscribers is invested as per the allocation selected.
Eligibility Guidelines for Opening NPS Accounts Across Categories
The 3 different models under National Pension Scheme are
The Government Sector Model
National Pension Scheme is compulsory for Central Government employees who commenced service after January 1, 2004, excluding armed forces personnel, and is also applicable to Central Autonomous Bodies’ employees from the same date. Additionally, it is accessible to State Government and State Autonomous Bodies’ employees if their respective State/UT chooses to opt for it.
Central Government/ CAB’s
- Mandatory Coverage – Consequently, all Central Government employees joining on or after January 1, 2004, are mandatorily covered under the NPS scheme.
- Extension to CAB Employees – NPS is also extended to the employees of Central Autonomous Bodies (CABs) joining on or after January 1, 2004.
- Contribution Provision – According to a notification by the Ministry of Finance, CABs are permitted to contribute to the NPS accounts of their employees who joined before January 1, 2004.
State Government/SAB’s
- State Government/UT Employees – Employees of the State Government/Union Territory (UT) adopting NPS are covered under NPS.
- Extension to State Autonomous Bodies – NPS is also extended to the employees of State Autonomous Bodies that have adopted NPS.
Corporate Model
Corporates have the option to voluntarily enroll their employees in NPS, with contributions made to the NPS account based on employment terms.
You’re eligible to open an NPS account if you’re employed in a corporate and meet the following criteria
- Your corporate has embraced the NPS scheme
- You are an Indian citizen, whether residing in the country, a non-resident, or an Overseas Citizen of India, you are eligible to enroll.
- You must fall within the age bracket of 18 to 70 years. Additionally, compliance with Know Your Customer (KYC) norms is mandatory.
The corporate model is available to the following entities
- Entities registered under the Companies Act, 2013 or a cooperative society registered under any Cooperative Societies law.
- Bodies established or incorporated under any Act of Parliament, state legislature law, or under orders/notifications from Central/state governments.
- Public Sector Enterprises or government companies.
- Registered Partnership Firms.
- Limited Liability Partnerships.
- Proprietary Concerns.
- Trusts/Societies.
- Foreign companies registered under Sections 591-608 of the Companies Act, 1956, for their eligible Indian employee(s).
- Foreign/diplomatic missions operating in India (Embassy/High Commission/Consulate, etc.) for their eligible Indian employee(s).
- International organizations operating in India (UN/WHO/World Bank/ADB/IMF, etc.) for their eligible Indian employee(s).
All Citizen Model
You can open an NPS account if you’re an Indian citizen, whether residing in India or abroad, or an Overseas Citizen of India, provided you meet the following criteria
- Age Requirement – You must be between 18 and 70 years old at the time of submitting your application to the Point of Presence (PoP) / PoP-Service Provider (PoP-SP), or when applying online via e-NPS.
- KYC Compliance – You are required to adhere to the Know Your Customer (KYC) norms specified in the Subscriber Registration Form (SRF) and provide all necessary documents for KYC verification.
- Ineligibility – Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible to subscribe to NPS.
- Individual Account – NPS is strictly for individual pension accounts and cannot be opened on behalf of a third party.
Option to change the Scheme or Fund Manager
NPS offers its subscribers the flexibility to switch the pension scheme or fund manager once per financial year if they are dissatisfied with the fund’s performance. This option is applicable to both Tier I and Tier II accounts.
Under the ‘All Citizen Model’ and ‘Corporate Model’, all subscribers or employers have the opportunity to modify their investment choice or asset allocation up to four times in a financial year. This includes switching between Auto Choice and Active Choice, or adjusting the allocation ratio among asset classes under Active Choice.
Navigating NPS Withdrawal & Exit Rules
Before reaching the age of 60 or upon reaching superannuation, you can opt for partial withdrawal from your NPS account without the need to close it.
Partial Withdrawal
Eligibility for Partial Withdrawal
Partial withdrawal requests are open to NPS subscribers who have held their accounts for a minimum of 3 years from the date of joining the scheme.
There must be a gap of five years between the withdrawals. However, this condition of a gap does not apply in case the withdrawal is being made for the treatment of a specified illness.
Frequency and Limits of Partial Withdrawal
- You can withdraw up to a maximum of 3 times during the entire tenure of your NPS account.
- You can withdraw up to 25% of the contribution in NPS at any time, excluding those made by your employer, if any.
Circumstances for Partial Withdrawal
- Financing higher education for your children, including legally adopted ones.
- Funding the marriage ceremonies of your children, including legally adopted ones.
- Acquiring or constructing a residential property in your name or jointly with your legally wedded spouse.
- Covering medical expenses for specified illnesses requiring hospitalization and treatment for yourself, your legally wedded spouse, your children (including legally adopted ones), or dependent parents.
- Addressing medical and incidental costs resulting from a disability or incapacitation.
- Supporting expenses related to skill development, re-skilling, or other self-development activities, as permitted by PFRDA regulations.
- Initiating your venture or start-up, in accordance with PFRDA guidelines.
Exit and Withdrawal on retirement
Upon reaching the age of 60 years or superannuation, a subscriber has three choices: withdrawal, continuation of their NPS account, or deferment of withdrawal.
If an Individual Chooses for Withdrawal
Subscribers who join the NPS after reaching the age of 60 but before attaining superannuation or retirement can exit the scheme upon reaching the age of 60. Upon exit, they must utilize a minimum of 40% of their corpus to purchase an annuity from approved annuity service providers, which will then provide a monthly pension. The remaining balance, constituting 60% of the corpus, can be withdrawn as a lump sum.
If an Individual Chooses for continuation of NPS Account
Subscribers can contribute to their NPS account beyond the age of 60 years or superannuation until they reach 75 years old. During this extended period, subscribers retain the flexibility to withdraw funds from their NPS account at any time. If a subscriber opts to continue contributing after turning 60, they are ineligible for deferment of withdrawal. This is because there is no necessity for deferment, given that the subscriber can exit the NPS at any point during the extended period by exercising the option to do so.
If an Individual Chooses for deferment of withdrawal
Subscriber can defer withdrawal and stay invested in NPS up to 75 years of age. Subscriber has the following options
- Defer Lumpsum withdrawal
- Defer only Annuity
- Defer both lumpsum & Annuity
If a subscriber chooses to defer, he/she will not be allowed to make contributions to their NPS account.
Exit and Withdrawal before retirement
If a subscriber resigns or exits from the NPS before reaching the age of 60 or before superannuation as stipulated in the employment terms, a minimum of 80% of the corpus must be used to purchase an annuity, while the remaining balance is disbursed to the subscriber as a lump sum.
If subscribers enroll in the NPS after turning 60, they have the choice to exit before three years have passed since joining. Should they decide to exit within this timeframe, they must allocate a minimum of 80% of the corpus towards purchasing an annuity, while the remaining corpus can be withdrawn as a lump sum.
In case the accumulated corpus at the time of exit is equal to or less than Rs. 5 lakhs, the subscriber will have the option to withdraw the entire corpus in lumpsum.
In case of unfortunate death of the subscriber, the entire accumulated corpus will be paid to the nominee of the subscriber as lumpsum; or nominee can purchase annuity, if they so desire
Maximize Savings with NPS: Explore Exclusive Tax Benefits
NPS Tier, I Account Tax Benefits
Tier I investments are eligible for NPS deductions or NPS tax saving benefits under Section 80 CCD (1), Section 80CCD (1B) and Section 80CCD (2) of the Income Tax Act, 1961.
Tax Benefits under Section 80C – The National Pension System (NPS) is among the investment options eligible for tax benefits under Section 80C. You can allocate your funds to NPS to avail of these benefits. The deduction limit for Section 80C is Rs. 1.5 lakhs. If desired, you can invest the entire amount in NPS and claim the applicable deduction.
Tax Benefits under Section 80CCD (1B) – NPS investors enjoy an additional tax benefit through Section 80CCD (1B). Under this provision, individuals can claim tax deductions on NPS investments of up to Rs. 50,000, which is separate from the deduction available under Section 80C.
In summary, investing in NPS allows for tax deductions of up to Rs. 2 lakhs in total – Rs. 1.5 lakhs under Section 80C and an additional Rs. 50,000 under Section 80CCD (1B). For those in the 30% tax bracket, this could result in potential tax savings of Rs. 62,400.
Tax Benefits under Section 80CCD (2) – Salaried individuals can claim contributions made by their employer to NPS under this deduction section. Government employees are eligible to claim up to 14% of their salary, while private sector employees can claim up to 10% of their salary (basic + dearness allowance) under this provision.
NPS Tier 2 Account Tax Benefits
The NPS Tier 2 account is a discretionary account allowing for both regular investments and withdrawals, without any limitations on withdrawals. However, to initiate a Tier 2 account, possession of a Tier 1 account is mandatory. As of now, there are no tax advantages associated with the Tier 2 account.
NPS Tax Benefit on Partial Withdrawal
Following a 3-year investment period, investors are permitted to withdraw a maximum of 25% from the corpus in their NPS Tier I account for designated purposes, such as medical expenses, children’s higher education, marriage, among others. These withdrawals from NPS are tax-exempt.
NPS Tax Benefit on Returns
Returns from the NPS Tier I account remain tax-free until maturity, implying that any returns accrued from market-linked investments are exempt from taxation.
NPS Tax Benefit on Maturity
Upon reaching the age of 60, investors are eligible to withdraw up to 60% of the corpus from their NPS account as a lump sum. The remaining 40% must be utilized to purchase annuities. These withdrawals and annuity purchases are both tax-exempt. This lump sum withdrawal is entirely tax-exempt under Section 10(12A).
NPS Tax Benefit on Purchase of Annuity
Upon maturity, individuals are required to allocate 40% of their total NPS corpus towards annuities. This allocation is also tax-exempt under Section 80CCD (5). However, any income earned through the annuity plan is taxable according to the individual’s income tax slab.
While NPS offers significant tax benefits that can effectively lower your taxable income, it’s important not to view tax savings as the sole reason to invest in it. NPS stands out as an excellent option for building a retirement corpus due to its affordability and adaptability. Therefore, invest with the primary goal of securing your financial future rather than solely for tax advantages.
Secure your future today with the National Pension Scheme (NPS)! With its flexible investment options, tax advantages, and the promise of a stable income post-retirement, NPS is your gateway to financial security in your golden years. Don’t delay any longer; start investing in your future today with NPS and ensure a comfortable and worry-free retirement tomorrow. Schedule a free consultation call today Let’s build a solid financial foundation together and pave the way for a brighter tomorrow. Join the NPS revolution now!
