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A pension plan provides financial security after retirement when people don’t have a regular stream of income. It ensures that people can become financially independent and don’t have to compromise on their living standard.
The Government of India launched the National Pension Scheme (NPS) on 1st-January-2004 with an aim of providing retirement income to all citizens of the country.
What is National Pension Scheme?
Regulated by PFRDA, the National Pension Scheme (NPS) is a voluntary contribution, market-linked scheme. It helps people make regular contributions towards the pension account during their employment. After retirement, the scheme subscriber can withdraw a certain percentage of the amount. With the remaining amount, you will receive monthly pension post retirement.
The scheme was firstly introduced for the new government employees (not for armed forces). And, from 1st-May-2009, It has been provided to all citizens of the country on voluntary basis. This pension system is open employees of public, private and unorganized sectors.
Who Should Invest in NPS?
Anyone who is seeking to plan for the retirement should invest in the NPS. Getting a regular pension after retirement years is always beneficial, especially the retired employees from private-sector jobs who don’t have any other financial support post their retirement.
A salaried people from any working sector should apply for and invest in NPS. It also provides tax deductions under section 80C of the Income Tax Act.
Eligibility Criteria to Invest in NPS
Any Indian citizen between 18 to 65 years of age, who is working in any industry or business sector, can opt to invest in this scheme.
How to Open an NPS Account?
You can open an NPS account via online and offline process.
Online Process
You can easily open account quickly via online process. For this, you need to go to enps.nsdl.com, complete registration through OTP sent to your mobile. Here, you will get a PRAN account number through which you can log in to NPS portal and start investing.
Offline Process
To open account offline, you firstly need to search for a PoP, and get a subscriber form from PoP service provider. Get the form filled completely and submit it with the KYC documents. After making the initial investment, PoP service provider will send you a PRAN. You will also receive PRAN number and password to operate your account.
Features & Benefits of Investing in NPS
Returns
A major portion of your investment goes towards investing in equities. The return in this scheme is not guaranteed, but it offers higher return than traditional investments like a bank FD/ RD, PPF, and NSC. The traditional investments however, offer guaranteed returns.
This scheme usually delivers 10%-12% annual returns or even more. The more time for which you invest in, higher the chances to obtain high returns. Also, you have the option to change the fund manager, if you are not satisfied with the fund performance.
Note: The returns in NPS will vary, depending on the fund performance.
Option of Two Different Accounts
Under the National Pension Scheme, individuals are allowed to make investments through one of the two accounts— Tier-I account & Tier-II account.
Tier-I account
You need to deposit a minimum of Rs. 500 to open this account. This account is best suited for retirement planning. It comes with the long-term investment and thus, there is no option to withdraw amount before retirement.
Tier-II account
It is just like a voluntary savings account. Under this, you need to deposit at least Rs. 1,000 for account opening. There is no lock-in period for your investment in tier-II account and thus, you can withdraw amount anytime. For government employees, there is a lock-in period of 3 years to avail tax benefit.
Flexibility of Investment
Subscribers in NPS have the option to choose from two different investment choices.
Auto choice
It is a default option available under NPS investment. Under this option, your investments are managed by a fund manager, depending on the investor’s age and risk profile.
Active choice
Under this option, investors have control to decide funds in which their money will be invested. Moreover, they can allocate specific percentage of investment in different funds, with the maximum limit of investment up to 50% for equities. Other asset classes in which you can choose to invest in include, Corporate Debt Securities (asset class C) and Government Securities (asset class G).
Just like fund manager, you have an option to change the investment option.
Withdrawal Rules
Before retirement, the complete withdrawal/ closure of NPS amount before retirement is only available only under Tier-II account.
After retirement, you can withdraw up to 60% of the corpus amount and the remaining 40% of the amount helps you receive a regular monthly pension. As per the latest update from the central government, the total withdrawal corpus at the time of retirement (60% amount) is entirely tax-free.
Partial Withdrawals
You can make partial withdrawals up to 25% of amount, if it has been at least 3 years of investing in the scheme. The partial withdrawal is allowed for following specific scenarios.
- Children’s higher education or wedding
- Critical illnesses treatment for self or family
- Buying or building a house
You can withdraw money up to a maximum of three times through the entire investment tenure. These limitations are imposed only on Tier-I account.
Tax Benefits
You can avail tax benefits for investing in National Pension Scheme, as specified under the following sections.
Applicable Income Tax Sections | Tax Benefits |
80CCD(1) | Subscriber’s contribution with overall limit of Rs. 1.5 lakh |
80CCD (1B) | Additional Rs. 50,000 as tax deduction for Tier-I contribution |
80CCD(2) | For central government employees, tax deduction up to 14% of employer’s contribution. 10% for other employees |
Other tax benefits:
- Premature withdrawals up to 25% of amount from Tier-I account is exempt from tax.
- Monthly income after retirement (pension) which generates from annuity purchase is taxable.
- Lumpsum withdrawal from NPS corpus at retirement is exempt from tax.
Comparison of NPS Scheme with Other Tax Saving Investments
Investment | Interest Rate (p.a) | Investment Duration | Risk profile |
NPS | Market-linked returns 10%-12% | Till retirement | High risk |
NSC | 6.8% | 5 years | Low risk |
PPF | 7.1% | 15 years | Low risk |
FD | 4-6% | 5 years | Low risk |
ELSS | Market-linked returns 10%-12% | 3 years | High risk |