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

What is NPS? (National Pension Scheme)

NPS Returns

As an investor, you should know more about NPS investment. However, it is necessary to know what NPS is.

The National Pension System (NPS) is a retirement scheme for all Indian citizens. It is a defined contribution-based, voluntary scheme where earning individuals contribute to their retirement accounts.

The Pension Fund Regulatory and Development Authority (PFRDA) administers and regulates the NPS.

The returns from the National Pension Scheme are linked to the performance of the underlying instruments in which the scheme invests. The NPS invests in a mix of assets such as government securities, corporate bonds, REITs, InVITs and equities. The returns are market-linked and hence, variable.

What are the Different Forms of National Pension Scheme (NPS)?

The NPS offers two types of accounts to cater to the different needs of the subscribers:

1. Tier-1 Account: This is a mandatory retirement account for all NPS subscribers. When a subscriber joins NPS, this is the account that gets created by default. The contributions to this account are eligible for tax benefits. However, the corpus from a Tier-1 Account can be withdrawn only when the subscriber reaches the age of 60 or satisfies exit conditions.

2. Tier-2 Account: This is a voluntary savings account associated with the NPS. A Tier-2 Account cannot be created without a Tier-1 Account. This is a withdrawable account, i.e., subscribers are free to withdraw their savings from this account whenever they wish. However, the contributions to this account do not qualify for tax benefits.

What are the Features and Benefits of the National Pension Scheme (NPS)?

Earn High Returns with NPS

The NPS invests in a mix of equities, government securities, REITs, InVITs, and corporate bonds. This offers the potential for market-linked returns over the long term. The actual returns depend on the performance of these underlying assets and the investment decisions made by the individual pension fund managers.

Assess your Risk

All investments are subject to some amount of market risk. This is also applicable to NPS. While a subscriber has the option of choosing his asset class, the risk depends on the type of asset. For instance, any allocation in government securities may carry minimal risk, whereas an equity allocation may be a riskier proposition. Hence, it is necessary to assess the risk factors before choosing the asset.

NPS Tax Benefits. Withdrawal Rules After 60 Years

NPS Tax benefits can be understood depending on the type of account that has been chosen.

An additional tax deduction of Rs.50,000 under Section 80CCD(1B) is available every financial year for investment in NPS. This is over and above the limit of Rs.1.5 Lakh under Section 80C.

The pension received from the Pension Fund after retirement is taxable as per the individual’s income tax slab.

There is no tax benefit.

• Employee Contribution to NPS: The employee is eligible for tax deduction up to 10% of Salary (Basic + DA) under Section 80CCD(1) subject to the overall limit of Rs.1.5 Lakh under Section 80C.

• Employer Contribution to NPS: The employee is eligible for a tax deduction for the amount contributed by their employer under Section 80CCD(2), over and above the limit of Rs.1.5 Lakh under Section 80C.

The eligible amount is the least of:

• Actual amount contributed by the employer;

• 10% of Salary (Basic + DA). For Central Government employees, this limit is 14% of their Salary;

• Gross Total Income

An additional tax deduction of Rs.50,000 under Section 80CCD(1B) is available every financial year for investment in NPS. This is over and above the limit of Rs.1.5 Lakh under Section 80C.

The pension received from the Pension Fund after retirement is taxable as per the individual’s income tax slab.

There is no tax benefit for corporate employees and the general public. Central Government employees are eligible for tax deductions up to Rs.1.5 Lakh under Section 80C. However, the investment has a lock-in period of 3 years.

Early Withdrawal Allowed

The NPS allows partial withdrawals from Tier-1 accounts only after three years of joining the scheme. Partial withdrawals are allowed only for specific purposes like:

• higher education of children;

• marriage of children;

• starting a new business;

• purchase or construction of a subscriber’s 1st self-owned house only; and

• treatment of specified critical illnesses

A subscriber may withdraw a maximum of 25% from the contributions made by them only. Withdrawals from employer’s contributions are not allowed.

A subscriber can make such partial withdrawals a maximum of 3 times during their entire tenure with NPS, with a gap of at least 5 years between successive withdrawals. Premature exit: A subscriber may choose to take early retirement and exit from the NPS. Under such circumstances, they must use at least 80% of the accumulated corpus to purchase an annuity. They may withdraw the remaining 20% only.

However, if the accumulated corpus is less than or equal to Rs.2.5 Lakh, the entire amount can be withdrawn as a lump sum. There is no mandatory requirement to purchase a Pension Fund.

Withdrawal Rules After 60

Contributions to NPS stop when an individual completes 60 years of age. At this point, at least 40% of the accumulated corpus has to be invested to purchase an annuity. The remaining 60% can be withdrawn as a lump sum or in instalments (up to 10 instalments).

However, if the accumulated corpus is less than or equal to Rs.5 Lakh, the entire amount can be withdrawn as a lump sum. There is no mandatory requirement to purchase a Pension Fund.

Subscribers also have the option to voluntarily continue their contributions up to a maximum of 75 years of age. During such an extension, they can leave the scheme whenever they choose to, without paying any penalty.

Please Note: Government employees cannot extend their contributions beyond retirement.

Up to 75% Equity Allocation

The NPS offers two fund management options - Active Choice and Auto Choice.

a. The ‘Active Choice’ subscribers decide their own asset allocation subject to the following constraints:

• A maximum of 50% in equity market instruments

• Up to 100% in fixed-income securities (other than government securities)

• Up to 100% in Government securities

b. The ‘Auto Choice’ is the default option under NPS unless the subscriber chooses the ‘Active Choice’. The ‘Auto Choice’ automatically adjusts the asset allocation based on the age profile of the subscriber.

How to open an NPS account?

NPS is distributed through authorised ‘Points of Presence’ (PoP). Such a PoP may be a Public or a Private Bank or an authorised NBFC (Non-Banking Financial Corporation).

A subscriber can also open an NPS account online by visiting the eNPS website.

How to do NPS Registration?

The registration process for the NPS involves the following steps:

• Fill in the application form: This includes personal details, nominee details, and scheme preference details.

• Submit KYC documents: This includes identity proof, address proof, and age/date of birth proof.

• Make the initial contribution: The minimum initial contribution for Tier-1 Account is Rs.500 and Rs.1000 for Tier-2 Account.

Once the registration process is complete, the subscriber will receive a Permanent Retirement Account Number (PRAN). This unique 12-digit number identifies their NPS account. The PRAN remains the same, irrespective of whether the subscriber has changed residences or transferred their NPS account from one PoP to another.

• NSDL NPS Portal:

• Karvy NPS Portal:

How to Do NPS Login?

Once subscribers receive their PRAN, they can log in to their NPS account through the Central Recordkeeping Agency (CRA) website. There are two CRAs - NSDL and Karvy.

NSDL NPS Portal

Visit the NSDL NPS portal at (enps.nsdl.com). Enter PRAN and password to log in.

Karvy NPS Portal

Visit the Karvy NPS portal at (nps.kfintech.com). Enter PRAN and password to log in.

How is NPS calculated?

The NPS corpus at the time of retirement is calculated based on the total contributions made and the returns earned on these contributions. Many online calculators are available to calculate returns on NPS, and estimate the final corpus.

However, hands-on subscribers may use the following formula to calculate their expected returns:
A = P(1 + r/n)^nt
Here,
A = is the final corpus
P = contributions made by subscriber
r = rate of returns
n = number of times the returns have compounded
t = total tenure of the investment
It is necessary to remember that NPS does not give fixed and consistent returns every year.

NPS Interest Rate:

The NPS has no fixed interest rate. The returns on the NPS are market-linked. The performance of the underlying investments determines returns. The actual returns vary based on the asset allocation, the performance of the individual assets, and the tenure of the investment.

What are the NPS Charges applicable?

Several charges are associated with the NPS, including:

1. Account Opening Charge: This is a one-time fee charged when opening the NPS account.
2. Annual Maintenance Charge: This annual fee is charged for maintaining the NPS account.
3. Transaction Charges: These are charged every time a contribution is made to the NPS account.
4. Annuity Service Charges: These are charged by the annuity service providers.

How to Use the NPS Calculator?

An NPS calculator is a tool that helps you estimate the retirement corpus you will accumulate through your NPS investments. Follow these steps:

1. Enter your current age.
2. Enter the age at which you plan to retire.
3. Enter the amount you plan to invest in NPS every month.
4. Enter the expected rate of return on your NPS investments.
5. Click on ‘Calculate’.

The calculator will show you the estimated corpus at retirement, the lump sum amount you can withdraw at retirement, and the monthly annuity you will receive.

FAQs on National Pension Scheme

Are NPS returns taxable?

FY 2019-20, NPS follows the EEE (Exempt-Exempt-Exempt) model. The contributions and the returns earned on these contributions are tax-free. Up to 60% of the corpus withdrawn from the NPS at the time of retirement (after the age of 60) is tax-free. The remaining 40% of the NPS corpus is mandatorily used to purchase an annuity plan. The annuity income received in the subsequent years is subject to tax based on the individual's tax bracket in the year of receipt.

Is it worth investing in NPS?

Many people prefer a regular income in their retirement years. Some do not wish to hold a lump sum amount in the bank for personal security reasons. Further, many end up spending easily accessible money.

Also, NPS is a good option for long-term investment. Since it is linked to the market only partially, it has the potential to balance higher returns with reasonable capital safety. However, investment decisions should be based on one’s financial goals and risk appetite.

Who can open the NPS account?

Any Indian citizen from 18 to 70 years of age can open an NPS account. Non-resident Indians (NRIs) can also open an NPS account.

Is NPS voluntary?

Yes, the NPS is a voluntary scheme. Individuals should decide to invest in NPS as per their retirement goals and risk tolerance.

How can I deduct NPS in ITR?

Section 80C of the Income Tax Act, 1961, provides for NPS contributions to be claimed as a deduction. Additionally, investments up to Rs.50,000 in NPS Tier-1 Account is also eligible for deduction. This is over and above the deduction of Rs.1.5 Lakh available under Section 80C.