NPS (National Pension Scheme) - Know Its Features, Benefits & Types

What is NPS? (National Pension Scheme)

As an investor, it is crucial to understand what is NPS before making any long-term retirement decisions. The NPS scheme is designed to help individuals build a retirement corpus while enjoying market-linked growth and tax benefits.
The National Pension Scheme is a defined contribution-based retirement plan available to all Indian citizens. It is voluntary, allowing subscribers to invest regularly in their pension accounts during their working years.
The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and governance of the national pension fund scheme.

NPS Returns

The returns from the National Pension Scheme depend on the performance of the underlying instruments in which the fund invests. The NPS investment portfolio includes government securities, corporate bonds, equities, REITs, and InVITs. Since returns are market-linked, they may vary over time, offering higher growth potential compared to traditional fixed-income products.

Forms of National Pension Scheme (NPS)

The NPS scheme details highlight two account types:

Tier-1 Account: This is the primary retirement account. Contributions to a Tier-1 Account are eligible for NPS tax benefits, and the corpus can generally be withdrawn only after 60 years or under specified exit conditions.
Tier-2 Account: This is an optional savings account linked to the NPS scheme. Subscribers can withdraw anytime, but contributions do not qualify for tax benefits. A Tier-2 Account can only be opened if a Tier-1 Account exists.

Features and Benefits of the National Pension Scheme

Earn Market-Linked Returns:

The National Pension Scheme invests in a diversified portfolio including equities, corporate bonds, government securities, REITs, and InVITs. Subscribers can potentially earn higher NPS returns depending on asset allocation and fund manager decisions.

Risk Assessment:

All investments carry market risk, including the NPS scheme. Allocations in government securities have minimal risk, whereas equities are higher risk. Evaluating risk is crucial before making investment choices.

Tax Benefits:

The benefits of NPS include significant tax deductions.

• Tier-1 Account (Self-Employed): An additional Rs.50,000 deduction under Section 80CCD(1B) is available on top of Rs.1.5 lakh under Section 80C. Pension withdrawals are taxable as per income slab.
• Tier-2 Account (Self-Employed): No tax benefit.
• Tier-1 Account (Employees): Employee contributions up to 10% of salary (Basic + DA) are deductible under Section 80CCD(1). Employer contributions are eligible for deduction under Section 80CCD(2). Additional Rs.50,000 deduction under Section 80CCD(1B) is also allowed.
• Tier-2 Account (Employees): No tax benefits for most employees; Central Government employees get deductions up to Rs.1.5 lakh, subject to a 3-year lock-in.

Partial Withdrawal and Early Exit

The NPS scheme details allow partial withdrawals from Tier-1 accounts after three years for purposes such as children’s education, marriage, buying the first home, starting a business, or critical illness treatment. Withdrawals are capped at 25% of contributions and can occur a maximum of three times with at least five years between withdrawals.
Early retirement is allowed, but at least 80% of the corpus must be used to purchase an annuity. If the corpus is below Rs.2.5 lakh, the full amount can be withdrawn as a lump sum.

Withdrawal Rules After 60

When an individual completes 60 years of age, contributions to the NPS scheme stop. At retirement, at least 40% of the accumulated corpus must be used to purchase an annuity, while the remaining 60% can be withdrawn as a lump sum or in up to 10 installments.
If the total NPS investment corpus is less than or equal to Rs.5 lakh, the entire amount can be withdrawn at once, without any obligation to purchase a Pension Fund.
Subscribers can also choose to voluntarily continue their contributions until 75 years of age, leaving the scheme at any time without penalty. However, government employees cannot extend contributions beyond retirement.

Up to 75% Equity Allocation

The National Pension Scheme offers two fund management options: Active Choice and Auto Choice.

Active Choice: Subscribers select their asset allocation within these limits:

• Maximum 50% in equity instruments
• Up to 100% in fixed-income securities (excluding government securities)
• Up to 100% in government securities

Auto Choice: This is the default option, where the system automatically adjusts asset allocation according to the subscriber’s age profile.

How to Open an NPS Account

The NPS scheme is available through authorized Points of Presence (PoP), including public or private banks and NBFCs. Subscribers can also open an account online via the eNPS website.

NPS Registration Steps:

1. Fill in the application form with personal, nominee, and scheme preference details.
2. Submit KYC documents (identity, address, age/date of birth proof).
3. Make the initial contribution: Rs.500 for Tier-1 and Rs.1000 for Tier-2.
After successful registration, a Permanent Retirement Account Number (PRAN) is issued, which remains the same even if the subscriber changes residence or transfers their NPS account.

NPS Login

Subscribers can access their accounts via the CRA websites:

• NSDL NPS Portal: Enter PRAN and password at enps.nsdl.com.
• Karvy NPS Portal: Enter PRAN and password at nps.kfintech.com.

How NPS is Calculated

The NPS returns depend on total contributions and market-linked growth. Subscribers can estimate their retirement corpus using calculators or the formula:
A=P(1+r/n)ntA = P(1 + r/n)^{nt}A=P(1+r/n)nt
Where:
A = Final corpus
P = Contributions made
r = Rate of return
n = Number of compounding periods
t = Investment tenure
Since returns are market-linked, there is no fixed interest rate.

NPS Charges

Charges associated with the National Pension Scheme include:

• Account opening charge (one-time)
• Annual maintenance charge
• Transaction charges on contributions
• Annuity service charges

Using an NPS Calculator

To estimate your retirement corpus:
1. Enter your current age and planned retirement age.
2. Input monthly NPS investment and expected rate of return.
3. Click ‘Calculate’ to view estimated corpus, lump sum withdrawal, and annuity income.

FAQs on National Pension Scheme

Are NPS returns taxable?

NPS follows the EEE (Exempt-Exempt-Exempt) model. Contributions and growth are tax-free. Up to 60% of the corpus withdrawn after 60 is tax-free, while the remaining 40% used for an annuity is taxed based on income slab.

Is it worth investing in NPS?

Yes. NPS offers partial market linkage, balancing higher potential returns with reasonable safety. It is suitable for long-term retirement planning.

Who can open an NPS account?

Any Indian citizen aged 18–70, including NRIs, can invest in NPS.

Is NPS voluntary?

Yes. Investment is optional, based on retirement goals and risk tolerance.

How to claim NPS deductions in ITR?

Contributions are eligible under Section 80C, with an additional Rs.50,000 under Section 80CCD(1B) for Tier-1 Accounts, beyond the Rs.1.5 lakh limit of Section 80C