National Pension Scheme (NPS)
National Pension System – All Citizen Model
- The National Pension System (NPS) is a retirement savings scheme that allows subscribers to make defined contributions towards planned savings for their future pension.
- It is a voluntary scheme aimed at providing a sustainable solution to the problem of inadequate retirement income for every Indian citizen.
- Subscribers who exit the NPS can use their accumulated pension wealth to purchase a life annuity from a PFRDA empaneled life insurance company.
- They can also choose to withdraw a part of their accumulated pension wealth as a lump-sum.
- The Pension Fund Regulatory and Development Authority (PFRDA) is the nodal agency responsible for implementing and monitoring the NPS.
Eligibility Criteria for Opening an NPS Account Under the All Citizen Model
- To open a National Pension System (NPS) account in India, the applicant must be a citizen of India, whether resident or non-resident.
- The applicant must be between the ages of 18 and 70 at the time of submitting their application.
- The applicant must comply with the Know Your Customer (KYC) norms prescribed for opening an NPS account.
- These conditions apply to opening an NPS account under the All Citizen Model.
Understanding the Advantages of a National Pension System (NPS) Account
- Low Cost: The National Pension System (NPS) is considered to be the world’s lowest cost pension scheme, with low administrative charges and fund management fees.
- Simple: To open an NPS account, all applicants need to do is open an account with any one of the Points of Presence (POPs) run through all Head Post Offices across India and obtain a Permanent Retirement Account Number (PRAN).
- Flexible: Applicants can choose their own investment options and pension funds, or select the Auto Choice option to get better returns.
- Portable: NPS accounts are portable, meaning subscribers can operate their account from anywhere in the country and pay contributions through any POP-SP (Point of Presence Service Provider), regardless of the branch with whom they are registered. This flexibility allows for contributions to be made through eNPS. Additionally, the account can be shifted to any other sector, such as the government sector or corporate model, in case the subscriber gets new employment.
Exploring Tax Benefits for Working Professionals
Individuals who are employed and contributing to NPS can enjoy tax benefits on both their personal contributions and their employer’s contributions.
- Employee’s Own Contribution:
- Eligible for a tax deduction of up to 10% of Salary (Basic + DA) under Section 80 CCD(1).
- This deduction falls within the overall ceiling of Rs. 1.50 lakhs under Section 80 CCE.
- Employer’s Contribution:
- The employee is eligible for a tax deduction of up to 10% of Salary (Basic + DA) contributed by the employer under Section 80 CCD(2).
- This deduction is in addition to the limit of Rs. 1.50 lakhs provided under Section 80 CCE.
Tax Benefits for Self-Employed
- Eligible for a tax deduction of up to 10% of gross income under Section 80 CCD(1).
- This deduction falls within the overall ceiling of Rs. 1.50 lakhs under Section 80 CCE.
- The subscriber can get an additional deduction for extra contributions made to their NPS account.
- This deduction is allowed under Section 80 CCD(1B) and is subject to a maximum investment of Rs. 50,000/-.
Type of Accounts
- Tier-I Account:
- This is a retirement account where the applicant can contribute their savings for retirement.
- The account has restricted withdrawal rules and offers tax benefits subject to the Income Tax rules in force.
- Tier-II Account:
- This is a voluntary savings facility.
- The applicant is free to withdraw their savings from this account whenever they wish.
- This account is not meant for retirement savings and the applicant cannot claim any tax benefits against contributions made to this account.
- The subscriber can make contributions through cash, local cheque, demand draft, or Electronic Clearing System (ECS) at the chosen POP-SP. For cash transactions exceeding Rs. 50,000, the subscriber needs to submit a copy of the PAN card as per AML rules. Outstation cheques are not accepted.
Minimum Contributions for Tier-I:
- Minimum contribution at the time of account opening and for all subsequent transactions: Rs. 500
- Minimum contribution per year: Rs. 1,000 (excluding charges and taxes)
- Minimum number of contributions in a year: 01
Charges and Penalty for non-compliance of mandatory minimum contributions:
- If the subscriber contributes less than Rs. 1,000 in a year, the account will be frozen, and CRA facilities such as online view of the account will be restricted.
- To reactivate the account, the subscriber needs to pay the minimum contributions of Rs. 500.
- A frozen account will be closed when the account value falls to zero.
Minimum Contributions for Tier-II:
- Minimum contribution at the time of account opening: Rs. 1,000 and for all subsequent transactions, a minimum amount per contribution of Rs. 250.
- There is no minimum contribution requirement for the financial year, and there is no cap on the maximum contribution.
How to Open an NPS Account
Opening an NPS account is a simple process regulated by the Pension Fund Regulatory and Development Authority of India. The PFRDA offers both online and offline methods to open an NPS account. Here are the steps to open an NPS account:
- Link your PAN, Aadhaar, and mobile number to your NPS account.
- Go to enps.nsdl.com.
- Choose the type of subscriber: Corporate or Individual.
- Select your residential status: Indian Citizen or NRI.
- Choose the type of account you want: Tier I or both accounts.
- Enter your PAN details and select a suitable POP or bank.
- Click on “Register with Aadhaar”.
- Enter your Aadhaar number and click on “Generate OTP”.
- Enter the OTP received on your registered mobile number.
- Fill in your personal information, bank details, and nomination details.
- Submit the application form and get the Permanent Retirement Allotment Number (PRAN).
- Verify your e-signature and photograph by entering the OTP sent to your registered mobile number.
- Make the payment of the required charges through net banking.
- Once the payment is successfully done, your Permanent Retirement Account Number will be generated.
- To open an NPS account offline, find the nearest Point of Presence (PoP).
- Collect the subscriber form from the PoP and submit it along with the completed KYC papers.
- Make the initial investment, and the PoP will send a Permanent Retirement Account Number (PRAN) in a sealed welcome kit to the individual.
- Use the PRAN number and password to operate the account.
- The offline process requires a one-time registration fee of Rs.125.
- NRIs need to complete additional steps to open an NPS account.
- Choose the status of the bank account i.e. repatriable or non-repatriable.
- Provide the details of the NRE or NRO bank account along with a scanned copy of the passport.
- Choose an appropriate communication address i.e either overseas address or permanent address.
- Once the permanent retirement account number (PRAN) is allotted, proceed further for the authentication.
- For the e-sign option, choose the option of e-sign from the E-sign/print & courier page.
- Authenticate with OTP sent on the registered mobile number. Note that the number should be linked with your Aadhaar Card.
- After Aadhaar authentication, the registration form is successfully signed.
- Note that a service charge is applicable for NRIs for E-signing the registration form.
Type of Funds in the National Pension Scheme in India
|Class Of Fund||Invested In||Risk Average||Return Since Launch (%)|
|E||Index-based Stocks||Carry market risk like any large-cap equity fund||3.79%|
|C||Bonds issued by State Govt, PSUs and Private Firms||Going by the quality of companies, the risk would be low.||8.66%|
|G||Bonds issued by Central Govt.||Lacks default risk but volatility can’t be avoided in long term bonds.||5.92%|
Depending on how open the investor is to risk, the corpus can be divided among these three fund classes. Exposure to equity cannot be more than 50%. However if the allocation is not specified, the exposure to various classes, especially equity is decided on the basis of age.
The above figure also tells us about the average performance of National Pension Scheme funds in different classes.
The Investment Mix According to the Age of the Investor
|Age of the Investor||Percentage of Investment in Various Classes|
|Up to 35 Years||50% Equity and 50% Debt|
|40 Years||40% Equity and 60% Debt|
|45 Years||30% Equity and 70% Debt|
|50 Years||20% Equity and 80% Debt|
|55 Years||10% Equity and 90% Debt|
So with increasing age, the investment corpus gets more inclined towards Debt
National Pension Scheme Interest Rate
- National Pension Scheme offers an interest rate ranging from 9% to 12% depending on the type of scheme and subscribers.
- Subscribers have the option to choose from different investment options and fund managers.
- The interest rate offered by NPS is higher compared to other investment instruments.
- The interest rate varies depending on the scheme chosen by the investor.
Withdrawal Option in NPS
- Normal Exit: The accumulated amount can be withdrawn at the age of 60 years.
- Premature Exit: A partial withdrawal of up to 25% of the contributions is allowed after 3 years of account opening for specific reasons such as higher education, marriage, treatment of critical illness, or purchase/construction of a residential property.
- Exit Before 60 Years: An individual can opt for an early exit from NPS before the age of 60, but at least 3 years after opening the account. In such cases, only 20% of the accumulated corpus can be withdrawn, and the remaining 80% must be utilized to purchase an annuity plan from a PFRDA empaneled insurance provider.
- Superannuation or Death Benefit: In case of superannuation or death, the entire accumulated corpus is paid to the subscriber/nominee.
- Note: Withdrawals are subject to taxation based on the prevailing tax laws.
NPS Withdrawal at Age 60
- When the NPS account matures at the age of 60, the subscribers can withdraw 60% of the accumulated corpus from the account.
- The remaining 40% of the accumulated amount is used to purchase the annuity.
- Subscribers need to provide their withdrawal details and bank account to the aggregator.
- The aggregator will upload the information to the CRA system for execution.
NPS Withdrawal Before 60 Yea
- NPS is a pension scheme that requires investment until the age of 60.
- Partial withdrawals are allowed after completing 3 years of opening the account.
- Subscribers can withdraw up to 25% of the total contribution made.
- Premature withdrawal is only applicable in specific circumstances such as sponsoring a child’s education, purchasing a house, or in case of a medical emergency.
- Subscribers can make a withdrawal up to 3 times in the intervals of 5 years in the entire tenure.
- These rules apply only to the Tier I account and not to the Tier II accounts.
NPS Withdrawal on Death of the Subscribers
- If the NPS subscriber passes away, the entire accumulated corpus is transferred to the beneficiary or the legal heirs.
- To withdraw the funds, the beneficiary or the legal heir needs to contact the aggregator.
- The aggregator will require the beneficiary or the legal heir to submit the required documents such as identity proof of the beneficiary, death certificate, etc.
Types of Withdrawal Forms Available
The following is the list of different forms available for different categories of withdrawal requests.
NPS Withdrawal Forms on Superannuation
|Form 101 GS||This form can be used by government employees, who want to make withdrawal post-retirement.|
|Form 301||This form can be used by corporate employees and other citizens who want to make a withdrawal on superannuation|
|Form 501||Applicable for subscribers who are part of the Swavalamban sector and want to make a withdrawal on the superannuation|
NPS Withdrawal Forms Before Superannuation
|Form 102 GP||This form can be used by government employees, who want to make a withdrawal before retirement.|
|Form 302||This form can be used by corporate employees and other citizens who want to make a withdrawal before superannuation|
|Form 502||Applicable for subscribers who are part of the Swavalamban sector and want to make a withdrawal before superannuation|
NPS Withdrawal Form For Claimants on Demise of the Subscriber
|Form 103 GD||This form can be used by the beneficiary/legal heir of the government employees, who was an NPS subscriber. The nominee can fill the form to claim the accumulated amount in the account of the subscriber.|
|Form 303||This form can be used by the beneficiary/legal heir of the corporate employees and other citizens who were an NPS subscriber. The nominee can fill the form to claim the accumulated amount in the account of the subscriber.|
|Form 503||Applicable for the beneficiary/legal heir of subscribers who were part of the Swavalamban sector. The nominee can fill the form to claim the accumulated amount in the account of the subscriber.|