National Pension Scheme
The National Pension Scheme, or NPS, is a government scheme that you can use for retirement savings. It allows you to systematically save and prepare for your future expenses after the age of 60.
What is the National Pension Scheme (NPS)?
NPS is a voluntary, defined contribution scheme for retirement. It was earlier only meant for Central Government employees but can now be used by employees of the private, public, and unorganized sectors. However, it is not available for the defence forces. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and backed by the Government of India.
Benefits and Features of the National Pension Scheme (NPS)
Here are some benefits and features of NPS:
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Flexible:NPS as a scheme offers flexibility in terms of payment frequency as you can pay multiple times in the same year. Moreover, there is no restriction on the maximum contribution amount. The minimum amount depends on the city that the subscriber resides in. Along with this, the subscriber can also choose from a wide range of investment options and account types. NPS subscribers can choose from equity, debt, and government securities. They can also switch from one investment option to another, as well as from one fund manager to another.
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Tax* benefits:NPS can offer several tax benefits on employee and employer contributions. - Employee contribution: Employees can claim a tax* deduction of up to 10% of their salary (Basic + Dearness Allowance) under Section 80CCD (1) of the Income Tax Act, 1961. The overall limit is capped at ₹ 1.50 lakh under Section 80CCE of the Income Tax Act, 1961. In addition to this, employees can also claim a tax* deduction of up to ₹ 50,000/- under Section 80CCD(1B) over the limit of ₹ 1.50 lakh under Section 80CCE of the Income Tax Act, 1961.
- Employer contribution: Subscribers can claim a tax* deduction of up to 10% of salary (Basic + Dearness Allowance) on the contributions made by the employer under Section 80CCD (2) of the Income Tax Act,1961 . This is above the limit of ₹ 1.50 lakh under Section 80CCE of the Income Tax Act, 1961.
In addition to this, self-employed individuals can claim a tax* deduction of up to 20% of their gross total income under Section80CCD (1) of the Income Tax Act, 1961, with the overall limit capped at ₹ 1.50 lakh under Section 80CCE of the Income Tax, 1961. They can also claim a tax* deduction of up to ₹ 50,000/- under Section 80CCD(1B) over the limit of ₹ 1.50 lakh under Section 80CCE of the Income Tax Act, 1961.
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Portable:You can continue using your NPS account for retirement savings even if you change jobs. Unlike some other retirement instruments that are linked to your job, NPS is not linked to your employer. It can be ported easily so you can build uninterrupted savings. -
Ease of access:You can manage your NPS online without any hassle. Online accounts make money management, contributions, and withdrawals a lot quicker and more convenient. Today, you can access your NPS account via a Mobile app available for subscribers. The app gives access to holdings, latest Net Asset Value (NAV), the total value of the schemes and more. -
Better returns:NPS allows you to invest in a combination of equity and debt. This lowers risk with diversification and enhances your returns. You can choose funds based on your goals and see optimum growth over time. -
Low cost:NPS is a cost-effective investment option with minimal fees. In fact, the annual fees on investment are only between 0.03% and 0.09%. -
Long-term compounding:Long-term growth from an NPS account can help you fulfill varied retirement goals. The earlier you invest your money, the more time it gets to compound and grow. Moreover, the cost of maintaining the account is very low, so your expense ratios are low, and your returns are maximised.
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Flexible
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Tax* benefits
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Portable
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Ease of access
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Better returns
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Low cost
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Long-term compounding
Types of NPS accounts
| Points of difference | Tier I NPS account | Tier II NPS account |
|---|---|---|
| Basic details | Indian citizens between the ages of 18 and 60 years can open a Tier 1 account. You do not need a Tier 2 account to open a Tier 1 account. Moreover, the Tier 1 account has a lock-in period until the age of 60. | You need a Tier 1 account to open a Tier 2 account. Additionally, there is no lock-in period for the Tier 2 account. |
| Withdrawals | You can withdraw only up to 60% of the total corpus at maturity. The remaining 40% has to be used to buy an annuity and will be paid to you as regular pension. | You can withdraw the entire account balance as a lump sum at maturity or make multiple withdrawals. |
| Tax exemption | The total corpus received at the time of withdrawal at retirement is exempt subject to conditions mentioned under Section 10 of the Income Tax Act, 1961 | The corpus received on withdrawal gets added to the taxable income and is taxed as per the prevailing income tax rate as per the Income Tax Act, 1961. |
| Minimum NPS contribution | ₹ 500 | ₹ 1000 |
| Maximum NPS contribution | No limit | No limit |
Options within NPS
NPS offers the following two options:
Who can open a NPS account?
Here is the eligibility criteria to open an NPS account:
Applicants must be citizens of India
Applicants must be between the ages of 18 and 60 years as of the date of submission of the application
Applicants should comply with the Know Your Client (KYC) specifications
Applicants should not be from the defence forces
How to open an NPS account?
There are two ways to open an NPS account – online and offline. Here are the steps for both:
Offline:
- Get the Permanent Retirement Account Number (PRAN) application form from any of the Point of Presence - Service Providers (POP-SP), which is a designated branch of your bank.
- Fill up the PRAN form with your personal details, signature, photograph, etc.
- Submit a copy of your identity and address proof like Aadhaar or Pan Card.
- You have to submit your first contribution slip of a minimum of ₹ 500 along with the application.
- Submit the PRAN application to the nearest POP-SP.
- A PRAN card will be sent to your address.
Online:
- Visit enps.nsdl.com or enps.kfintech.com.
- Enter your mobile number, Aadhaar Card Number, and Permanent Account Number.
- An OTP will be sent to your registered mobile number.
- After the registration is complete, a PRAN will be sent to you to log in to your NPS account.
How are the potential returns from the National Pension Scheme (NPS) calculated?
In order to plan your retirement, you must understand the potential returns from your NPS account. This can be done by using the compound interest formula:
A = P (1 + r/n) ^ nt
In addition to this, you can also use the NPS calculator to get quick and accurate results. Manual calculations may produce errors. The calculator eliminates the scope of errors and ensures precise values.
Here’s an example:
If you start an NPS account at the age of 30 and contribute ₹ 10,000 every month at a rate of interest of 9% for a period of 30 years until the age of 60,
Investment Amount
₹ 36,00,000
Earned Interest
₹ 1,47,07,435
Total maturity value
₹ 1,83,07,435
When can a subscriber exit/withdraw from NPS?
Exiting NPS refers to closing your account and terminating any further contributions to the scheme. The Pension Fund Regulatory and Development Authority (PFRDA) released a new notification on December 28, 2021, that states that a person can exit the NPS after five years from the account opening date. Earlier the lock-in period was ten years. Here are some things to know:
If you exit the scheme before the age of superannuation, i.e., 60 years, you must use at least 80% of the total corpus to purchase an annuity, and the remaining 20% can be claimed as a lump sum. However, if the total corpus is less than ₹ 5 lakh, the entire accumulated fund can be claimed as a lump sum.
If the exit is made after the age of superannuation, i.e., 60 years, you must use at least 40% of your accumulated pension to buy an annuity, and the remaining 60% can be withdrawn in a lump sum.
The PFRDA has also reduced the timeline for withdrawal from T+4 to T+2 working days.
In addition to this, the Insurance Regulatory and Development Authority of India (IRDAI) has asked insurance companies to ease out the life certificate submission process. Insurance companies can now follow Aadhaar based authentication to verify life certificates thanks to government initiatives like Jeevan Pramaan, which is a biometric-enabled digital service.
Do note that NPS aims at creating a substantial corpus when one is in their earning years, which can then enable you to purchase an Annuity, post-retirement. This, in turn, can help facilitate regular income post-retirement thereby ensuring old-age income security.
In October 2023, the Pension Fund Regulatory and Development Authority (PFRDA) introduced significant changes to the NPS withdrawal process. The new modification mandates instant bank account verification to facilitate quick transfer of NPS funds to subscribers’ bank accounts during withdrawal or exit from the scheme. Additionally, the proposed amendments allow subscribers to withdraw up to 60% of their pension corpus through the Systematic Lumpsum Withdrawal (SLW) on a flexible basis, such as monthly, quarterly, half-yearly or annually. This withdrawal flexibility is applicable up to the age of 75, as selected by the subscribers at the time of their regular retirement.
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