What is the National Pension System (NPS)?
The National Pension System (NPS) is a voluntary retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Under NPS, the subscriber makes defined contributions regularly towards the scheme . This money is managed by pension fund managers and invested in market-linked instruments like equity, corporate bonds, government securities and related instruments , Alternative Investment Funds etc
Once you reach 60 years of age, you can withdraw up to 60% of the total amount saved. The rest, 40%, must be used to buy an annuity plan that gives fixed payout at chosen frequency.
Note: If your total retirement corpus is ₹5 lakh or less, you can withdraw the full amount as a lump sum..
The features of NPS include long-term savings, flexibility in investments, partial withdrawals, and tax benefits.
Main Objectives of the National Pension System (NPS)
The main purpose of NPS is to help people build a retirement corpus over time. Some important goals of NPS are:
- To help individuals save money during their working years
- To provide regular income during retirement
- To reduce financial stress in old age
Key Features of the NPS
Let’s look at some of the important features of NPS that make it popular among working individuals.
Eligibility Requirements
- Any Indian citizen or NRIs aged between 18 and 70 years can open an NPS account.
- Overseas Citizens of India (OCI) are also eligible
- Must meet KYC (Know Your Customer) requirements as per the Subscriber Registration Form (SRF)
Not Eligible:
- Hindu Undivided Families (HUFs)
- Persons of Indian Origin (PIOs)
- NPS is an individual pension account andcannot be opened for others (i.e on behalf of a third party)
Types of NPS Accounts
- The National Pension System (NPS) is a retirement savings plan which offers two types of accounts: Tier 1 and Tier 2 accounts.
Tier 1 Account (Primary Account)
- This is the primary retirement NPS account.
- It has a mandatory lock-in period until the retirement age of 60.
- It is designed to build a retirement corpus with regular contributions.
- Minimum contribution to open account: ₹500 per transaction
- Partial withdrawals are only permitted under specified conditions (up to 25%) after 3 years.
- At 60 years or beyond , 60% may be withdrawn as lump sum ; and at least 40% must be used to purchase an annuity.
Tier 2 Account (Voluntary Savings Account)
- An add-on account which can be opened only if you have an NPS Tier 1 account
- No lock-in period.
- Minimum contribution to open account: ₹250 per transaction
- Withdrawals: Fully flexible with no limitations.
Flexible Options for Making Contributions
- You can make contributions online through official NPS sites like eNPS or authorized mobile apps using bank transfer/net-banking/UPI.
- Offline contributions are also available through Point of Presence-Service Providers (PoP-SP) such as select banks and financial institutions.
Range of Investment Choices Available
NPS offers a mix of asset classes to suit different risk profiles and investment goals. You can either choose your own asset allocation (Active Choice) or invest in a Life-cycle fund in which the proportion of funds invested across three asset classes that are determined by a pre-defined portfolio and would change as per your age. le (Auto Choice).
Available Asset Classes:
- Equity (E) and related instruments:
Invests in equity and related instruments of listed companies.- Tier 1: Up to 75%
- Tier 2: Up to 100%
- Corporate Bonds (C) and related instruments:
Debt and related instruments issued by companies.- Tier 1 & Tier 2: Up to 100%
- Government Securities (G) and related instruments:
Safe, long-term investments in government bonds.- Tier 1 & Tier 2: Up to 100%
- Alternate Investment Funds (A):
Includes instruments like REITs, infrastructure funds, etc.- Tier 1 only: Up to 5%
You can also opt for the Auto Choice option, where the subscriber invests in a Life-cycle fund in which the proportion of funds invested across three asset classes that are determined by a pre-defined portfolio and would change as per your age.
What are the Advantages of Investing in NPS?
Many benefits of NPS make it a good retirement savings plan:
Option to Switch Between Investment Strategies
You can switch between Auto Choice and Active Choice, and also change your fund manager, if needed. This adds flexibility to your plan.
Benefit from the Power of Compounding
The accumulated corpus grows over a period of time at a compounding rate and offers market linked returns based on your investment choice.
Transparency
You can track your investments online using your PRAN (Permanent Retirement Account Number).
Tax Advantages
If you are looking for NPS tax saving, the table will help you understand it better:
Tax Benefit
| Description
| Applicable to Account Type
| Tax Regime Applicability
|
Section 80CCD(1)
| Deduction up to 10% of salary (Basic + DA) or 20% of gross income for self-employed, subject to overall ₹1.5 lakh limit under 80CCE
| Tier I (self-contribution only)
| Old Tax Regime only
|
Section 80CCD(1B)
| Additional deduction of ₹50,000 over and above ₹1.5 lakh limit, in case of old tax regime (exclusive to NPS Tier I contributions)
| Tier I only
| Old Tax Regime only
|
Section 80CCD(2)
| Deduction for employer’s contribution up to 10% of (Basic + DA) and 14% in case of new tax regime. For central govt employees 14% of salary irrespective of regime choosen
| Tier I (employer contribution)
| Allowed under both Old and New Tax Regimes
|
Partial Withdrawals
| Withdrawals up to 25% of own contributions allowed during tenure are tax-exempt
| Tier I only
| Tax exempt
|
Maturity Lump Sum Withdrawal
| Up to 60% of corpus withdrawn at maturity or superannuation (subject to the criteria’s prescribed by the PFRDA under section 10(12B)is tax-exempt
| Tier I only
| Tax exempt
|
Annuity Purchase
| Amount used to buy annuity is exempt at purchase, but annuity income is taxable as per individual tax slab
| Tier I only
| Tax exempt at purchase; annuity income taxable
|
Tier II Account Contributions
| Contributions to Tier II account do not qualify for any tax rebates
| Tier II only
| No tax benefit
|
NPS Vatsalya Scheme
| Additional ₹50,000 deduction under Section 80CCD(1B) for contributions to the child welfare focused NPS variant.
This benefit exceeds the existing ₹1.5 lakh cap set by Section 80C, in case of old tax regime.
| Tier I only in NPS Vatsalya Plan
| Allowed under both Old and New Tax Regimes
|
Conclusion
Understanding what is NPS can help you prepare better for your retirement years. With regular contributions, market-linked investment , and regulated fund management. The features of NPS, such as flexible contribution modes, choice of investment, and partial withdrawal, give you control over your retirement planning.
The benefits of NPS also include tax advantages, creating a source of regular income after retirement etc .
FAQs
What are the advantages of NPS?
NPS offers long-term savings for retirement, flexible contributions, tax benefits, partial withdrawals, and professional fund management.
Is NPS withdrawal after 60 years of age tax exempt?
NPS corpus withdrawn at 60 years of age or beyond is tax-free (60% of the total corpus taken as lump sum). The remaining 40% used to buy an annuity is also exempt from tax.
