The National Pension Scheme (NPS) is a pension system open for all citizens of India. The NPS invests the contributions of its subscribers into various market-linked instruments such as equities and debts and the final pension amount on the performance of these investments. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India.
In the NPS, individual savings are pooled into a pension fund, which is invested in a diversified portfolio of assets like government bonds, bills, corporate debentures and shares. The returns on these investments contribute to the growth of the NPS account over a period of time.
Benefits of National Pension Scheme
The following benefits of the NPS Scheme:
- Tax Benefits: The tax benefits available under NPS are the most important reason why someone should consider investing in this scheme. As a long-term investment scheme, it allows a tax deduction up to a maximum of Rs. 1.5 lakh under the section 80C, 80CCD (1) and 80CCD (2). Moreover the subscribers are eligible to get an additional benefit of Rs. 50,000 which can be claimed by the investor as a tax benefit under Section 80CCD (1B).
- Pension Benefits: In this pension scheme you can keep yourself invested until the age of 60 years. However, NPS allows subscribers to make premature partial withdrawals under special cases. A maximum of 25% of the accumulated amount can be partially withdrawn after the completion of at least 3 years of continuous contributions to the funds. The same can be processed to furnish a child’s marriage, higher education, buying a house or medical emergencies. Upon retirement, subscribers can withdraw up to 60% of the corpus as a lump sum and use the remaining of 40% to buy annuity, which provides a regular pension scheme.
- Market Linked Returns: NPS invests in a number of mix of equities, bonds, and government securities, which provides market-linked returns to subscribers.
- Annuity Options: Subscribers have the option to choose from a range of annuity plans and providers, which provides flexibility in terms of pension income.
- Transparency: NPS provides subscribers with regular account statements, which can help them track their pension savings and investments performances.
New NPS Rules
New rules to know about:-
- Costs: Firstly, charges for NPS account holders have increased marginally after the NPS Trust allowed the recovery of administrative charges/expenses @0.005% of the Asset under Management (AUM) per annum.
- Contribution: NPS holder account holders can make regular contributions throughout their employment. A minimum of Rs. 6000 has to be contributed if you are a Tier 1 subscriber and if you are a Tier 2 subscriber, there is no minimum amount. However, if you decide to contribute, you can put in Rs 250.
- Withdrawal: As per NPS Tier 1 withdrawal rules, about 60% of the maturity amount can be withdrawn after retirement. The remaining 40% must be used to purchase an annuity. For NPS Tier 2 accounts, which acts as voluntary savings funds, investors can withdraw the invested sum as and when they want to. Under the unfortunate circumstances of the death of the account holder will be paid to the nominee or the legal heir.
- Fees: There has been a nominal increase in NPS fund manager fees from 0.01% to 0.09%. This is a minimal increase to ensure that the pension fund is financially sustainable for management. NPS fund managers now invest in IPOs and select from over 200 stocks.
Withdrawal and Exit rules
In this, if the total NPS corpus is less than or equal to Rs 2 lakh, individuals can choose 100% lump sum withdrawal. In case of premature exit before attaining 60 years of age, a minimum of 80% of the accumulated corpus must be utilised for annuity purchase and remaining can be withdrawn. It is important to highlight that, as per the NPS rules and regulations, you can only exit after completing 10 years.
Tax Exemption
Another significant update on the NPS new rules is that the government increased the Income Tax exemption on withdrawal from NPS to 60%, making NPS a tax-exempt financial product. This means that account holders will enjoy the benefits of tax exemption on the 60% that an investor can withdraw on maturity.
Flexibility
As per the latest NPS rules, Central Government employees subscribing to NPS will receive greater flexibility in choosing pension fund managers. As opposed to the earlier 15% cap, they can now select a combination of equities and debt funds for asset allocation. As per the new NPS rules, the Government has also allowed voluntary contribution by Central Government to Tier 2 NPS accounts employees locked in for three years to qualify for tax exemption under Section 80C.
National Pension Scheme Interest Rate
The NPS interest rate depends on asset performance, making it challenging to predict the amount of return received upon retirement cannot be determined beforehand. NPS scheme operates as a market-linked product, allowing investment in diverse assets including equity, government debt, corporate debt and alternative assets. Once the asset mix and fund manager is finalised, your funds are allocated to specific schemes within these four asset classes under the new pension scheme.
NPS also provides the flexibility to have two accounts – Tier 1 and Tier 2 accounts. Below are the returns shown for NPS current interest rate for various schemes of both Tier 1 and Tier 2 accounts as of September 24, 2024.
NPS Tier 1 Returns:
| Asset Classes | 1-year returns(%) | 5-year returns(%) | 10-year returns(%) |
| Alternative Assets (Scheme A) | 6.60%-11.59% | 6.04%-9.03% | NA |
| Equity (Scheme E) | 31.52%-40.31% | 16.83%-18.65% | 13.13%-14.39% |
| Corporate Bonds (Scheme C) | 6.89%-7.96% | 6.98%-8.05% | 8.40%-8.99% |
| Government Bond (Scheme G) | 8.77%-9.36% | 7.23%-7.50% | 8.87%-9.63% |
NPS Tier 2 Returns:
| Asset Classes | 1-year returns(%) | 5-year returns(%) | 10-year returns(%) |
| Corporate Bonds | 7.24%-8.11% | 7.24%-7.98% | 8.41%-8.79% |
| Government Bond | 8.31%-9.38% | 7.17%-7.47% | 8.89%-9.68% |
| Equity | 31.07%-39.99% | 16.86%-18.50% | 12.69%-14.22% |
| Scheme Tax Saver | 6.75%-13.22% | NA | NA |
*Interest rates provided in the above tables as taken from the NPS Website.
Types of NPS Accounts
There are two types of National Pension Scheme Accounts:
- Tier 1 NPS Account: This is a mandatory retirement account. You can withdraw money from your Tier 1 NPS account only after you reach the age of 60. However, you can make partial withdrawals after the age of 50. Minimum NPS contribution for opening an account is Rs 500.
- Tier 2 NPS Account: This is a voluntary savings account. You can withdraw money from your Tier 2 NPS account anytime. Minimum NPS contribution for opening an account is Rs 1000.
What are the Tax Benefits of National Pension Scheme
Employee Tax Benefits for Self Contribution:
- Tax deduction of up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs 1.5 lakh under section 80CCE.
- Tax Deduction of up to Rs 50,000 under Section 80CCD(1B), along with the overall limit of Rs 1.5 lakh under Section 80CCE.
Employee Tax Benefits on Employer Contributions:
- Employer’s NPS scheme contribution is eligible for deduction up to 10% of salary (Basic or DA) or 14% if by Central Government under Section 80CCD(2).
- Beyond Rs 1.5 lakh limit under Section 80CCE.
Note: As per the Budget 2024, the contribution allowed by employer’s has been increased to 14% from 10% of the salary. This change will be effective from 1st April 2025.
Tax Benefits for Self-Employed Individuals:
- Tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of Rs 1.5 lakh under Section 80CCE.
- Tax deduction of up to Rs 50,000 under Section 80CCD(1B), along with the overall limit of Rs 1.5 lakh under Section 80CCE.
Tax Benefits on Partial Withdrawals:
Partial withdrawals from NPS are eligible for tax exemption when the amount withdrawn is up to 25% of self-contribution, subject to the circumstances and criteria prescribed by PFRDA under Section 10(12B).
Tax Benefit on Annuity Purchase:
Tax exemption is provided on annuity purchase or superannuation at 60 years under Section 80CCD(5). However, the subsequent income from an annuity is taxed under Section 80CCD(3).
Tax Benefit on Lump Sum Withdrawal:
Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.
Corporate/employer Tax Breaks:
A tax deduction is provided on the amount contributed to an employee’s NPS account as an employer contribution, up to 10% of the employee’s salary (Basic + DA) of the employer’s contribution as a ‘Business Cost’ from the Profit & Loss Account under Section 36(1)(iv)(a).
National Pension Scheme Withdrawal Rules After Retirement (60 Years)
Currently, a person can withdraw up to 60% of the total corpus as a lump amount after retirement, with the remaining 40% going into an annuity plan. Under new NPS rules, subscribers can withdraw the entire corpus if it is less than or equal to Rs 5 lakh without purchasing an annuity plan. These withdrawals are also tax-free.
Withdrawals are tax-free, however, an annuity is taxable based on the income bracket rate. As a result, if your annuity is worth Rs 4 lakh, it will be taxed at the individual’s tax bracket rate. The payment is taxable in accordance with the years of payment.
Also Read: What is Unified Pension Scheme (UPS)?
National Pension Scheme Early Withdrawal or Exit Rules
Upon Superannuation: According to the NPS retirement rules, when the subscriber reaches the age of Superannuation/reaches the age of 60, he/she must use at least 40% of the accrued pension corpus to purchase an annuity that provides a regular monthly pension. The remaining monies are available for withdrawal as a lump payment. Subscribers can take 100% lump sum withdrawal if their entire accrued pension corpus is less than or equivalent to Rs 5 lakh.
Premature Exit: The premature exit (before reaching the age of superannuation or turning 60), at least 80% of the subscriber’s accrued pension corpus must be used to purchase an Annuity that provides a regular monthly income. If the total corpus is less than or equal to Rs 2.5 lakh, the subscriber can opt for 100% lump sum withdrawal.
Upon the death of the Subscriber: Following the subscriber’s death, the entire accrued pension corpus (100%) would be paid to the subscriber’s nominee/legal heir.
Option to Change the Scheme or Fund Manager
With NPS Fund Manager Returns, you have the provision to change the pension scheme or the fund manager if the performance is not matched with your expectations. This option is available for both Tiers l and Tiers ll accounts.
Eligibility Criteria for National Pension Scheme
The eligibility criteria for National Pension Scheme are as follows:
- Should be an Indian citizen or a Non-Resident Indian (NRI).
- Age should be between 18-70 years.
- Should comply with the Know Your Customer (KYC) norms detailed in the application form.
- Should be legally competent to execute a contract as per the Indian Contract Act.
- Overseas citizen of India (OCI), Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
- NPS is an individual account, thus it cannot be opened on behalf of a third person.
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How to open account in National Pension Scheme (NPS)
An NPS Account can be opened in both offline and online processes.
Offline Process
To open an NPS account through an offline process, you will have to find a PoP – Point of Presence, registered with PFRDA. Collect a subscriber form from your nearest PoP and submit it along with the KYC papers. This process can be skipped, if you are already KYC-compliant with the bank.
Once you make the initial investment (not less than Rs 500 or Rs 250 monthly or Rs 1000 annually), the PoP will send you a PRAN (Permanent Retirement Account Number).
This number and the password in your sealed welcome kit will help you operate your account. There is a one-time registration fee of Rs 125 for this process.
Online Process
In this online account opening process (enps.nsdl.com), you need your valid PAN, mobile number, Email ID, valid bank account and online payment option at your end.
You can validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.
How to calculate NPS
Formula to calculate National Pension Scheme:
Maturity value (MV) = P x (1 + R/N) ^ NT where,
P = Principal Invested
R = Assumed rate of return
N = Number of times the growth rate compounds
T = Tenure of the investment
How to Login to your National Pension Scheme Account for the First Time?
Here are the steps mentioned below, if you are a first time user:
- Step 1: You must have a 12-digit Permanent Retirement Account Number (PRAN), when you log into your NPS account. Submit the necessary documentation on the NSDL website.
- Step 2: Visit the official portal of NSDL CRA.
- Step 3: Enter your PRAN, Date of birth, new password, confirm password and enter the captcha. After you have entered all the details, click on the submit button.
- Step 4: An IPIN will be generated, which you can use for logging into the NSDL portal.
- Step 5: Log in to the NSDL eNPS page and click on ‘Login with PRAN/IPIN’.
- Step 6: On the next page, use PRAN and IPIN to sign into your NPS account.
What is the User ID for NPS Login?
Your Permanent Retirement Account Number (PRAN) that is offered on registration for the NPS account will be your user ID to log into the NSDL eNPS website.
What is Systematic Lump sum Withdrawal (LSW)
Systematic Lump sum Withdrawal is a facility under NPS where, upon superannuation exit, the lump sum corpus can be withdrawn in a phased manner. Subscriber has the option to withdraw the desired amount systematically at regular period intervals which can be monthly, quarterly, half-yearly or yearly.
Benefits of Opting SLW as compared to One-time Lump sum Withdrawal
Benefits of SLW as compared to One-time Lump sum withdrawal are:
- It will help the subscriber to generate regular cash flows.
- Along with Annuity, the regular cash flows through SLW will lead to an increase in the Subscriber’s monthly income.
- SLW is a tool for additional Wealth Creation as returns shall continue to accumulate on the reminder Corpus which remains invested under NPS.
NPS Customer Care Number
- NPS Call Centre Number: 1800 110 708
- NPS SMS Number: NPS to 56677
- NPS Toll-Free Number for Registered Subscriber (PRAN): 1800 222 080
Comparing NPS Scheme with Other Tax Saving Instruments
| Investment | Interest | Lock-in period | Risk Profile |
| NPS | 6% to 14% (expected) | Till Retirement | Market- related risks |
| ELSS | 10% to 12% (expected) | 3 years | Market- related risks |
| PPF | 7.1% (guaranteed) | 15 years | Risk-free |
| FD | 5% to 7% (guaranteed) | 5 years | Risk- free |
Conclusion
The National Pension Scheme stands as a significant and forward-looking initiative in providing financial security for individuals during their retirement years. It remains an important financial product providing a secure and stable financial future for individuals, contributing to the broader landscape of retirement plans.
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FAQs
Q.1 How to open an NPS Account?
An NPS Account can be started in both offline and online methods.
Offline: Find a PoP – Point of Presence, registered with PFRDA. Submit KYC papers and make an initial investment. After the investment, PoP will send you a Permanent Retirement Account Number. This number and the password in your sealed welcome kit will help you operate your account. There is a one-time registration fee of Rs 125 for this process.
Online: In this online account opening process (enps.nsdl.com), you need your valid PAN, mobile number, Email ID, valid bank account and online payment option at your end.
You can validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.
Q.2 What is an Annuity Scheme in NPS?
Annuity in the context of NPS refers to the monthly payment that will be received by the subscriber from the Annuity Service Provider after his exit from NPS.
Q.3 What is the National Pension Scheme Rate of Interest?
The NPS interest rate depends on the performance of the assets and are not fixed. Thus, the amount of return received upon retirement cannot be determined beforehand. However, the rate of interest is apparently higher than the ROI offered by many other saving schemes.
Q.4 What are the Maximum and Minimum contributions amounts for NPS accounts?
Subscribers have to make at least one contribution per year to keep their account in running or active mode. The contribution requirements for each type of account are mentioned below:
| For all citizens | Tier l Accounts | Tier ll Accounts |
| Min. Contribution for Account Opening | Rs 500 | Rs 1000 |
| Min. Amount per contribution | Rs 500 | Rs 250 |
| Min. Total Contribution Annually | Rs 1000 | None |
| Min. Frequency of Contributions | 1 per year | None |
Q.5 What is the National Pension Scheme for Traders and Self-employed person?
National Pension Scheme for Traders and self-employed persons Yojana is a voluntary and contributory Government Pension Scheme for Vyaparis, Retail Traders, shopkeepers, and self-employed persons with annual turnover not exceeding Rs 1.5 crore.
Q.6 What is the maximum age for the National Pension Scheme?
The maximum age to open an NPS account is 70 years. However, you can continue to stay invested in NPS after 60 years of age or superannuation, up to the maximum age of 75 years.
Q.7 What are the NPS Tier ll Account Benefits?
Some of the benefits Tier ll Account are:
- Flexibility
- Low cost management charges
- Professional Management
- Ease of Access
Q.8 What are the NPS tax benefits for salaried employees?
Employees contributing to NPS are eligible for following tax benefits on their own contribution: Tax deduction up to 10% of salary (Basic + DA) under Section 80CCD(1) within the overall ceiling of Rs 1.50 lakh under Section 80CCE.
Q.9 What is the NPS Maximum investment?
The maximum investment limit is 1.5 lakh under Section 80CCD(1b). Over and above the investment limit of Rs 1.5 lakh under Section 80C and limit of Rs 50,000 under Section 80CCD(1b).
Q.10 Which is better, UPS or NPS?
Unified Pension Scheme is better for stability and inflation protection, while the National Pension Scheme offers more investment options and potentially higher returns but with higher risk.
