National Pension Scheme (NPS): Complete Guide to Benefits, Taxation, and How to Invest
For some of us retirement planning may be the last thing on your mind. But did you know that the earlier you start planning for your retirement, the better off you will be in the long run? The National Pension Scheme (NPS) is a savings scheme designed to help individuals plan for their retirement. It allows you to contribute a small amount of your income every month towards your retirement fund. This can help you build a sizeable corpus over time. In this way, the NPS offers you the opportunity to plan for a secure and comfortable retirement, right from a young age.
In this article, we will explore what is NPS scheme and benefits of the same. Additionally, along with a few deciding factors that will make you more aware of this excellent retirement scheme. Let us begin by understanding the meaning of NPS.
What is National Pension Scheme or NPS?
NPS (National Pension Scheme) is a government-sponsored pension scheme that allows individuals to contribute regularly to a pension account during their working life. Contribution to NPS helps build a substantial retirement corpus by investing in a mix of equity, corporate bonds, and government securities, depending on the investor’s risk appetite. Understanding thoroughly “What is NPS and its benefits?” highlights its appeal as a flexible, tax-efficient investment option.
The National Pension Scheme offers several NPS benefits, including tax advantages under Sections 80C and 80CCD, flexibility in choosing investment options, and regular income in retirement, making it an attractive investment for those looking to secure their financial future. However, it’s crucial to thoroughly understand both NPS benefits and disadvantages, such as market risks associated with equity investments and the mandatory annuity purchase at maturity, before making any financial planning decisions.
For investors managing their accounts, platforms like enps.nsdl.com for online services offer convenient access to account details, making tracking contributions and managing investments easy. It’s also important to be aware of the NPS age criteria—typically starting from 18 years up to 70 years—ensuring eligibility for a wide age range of investors.
Now that we know about the National Pension Scheme and its objectives let us learn about the types of NPS accounts available.
What are the Types of NPS Accounts?
NPS (National Pension System) offers two types of accounts:
- Tier-I Account: This is a mandatory account and it is the primary National Pension Scheme account that needs to be opened by individuals who wish to join the NPS. It is a pension account where you contribute your savings during your working life, and the accumulated corpus is used to provide a pension after retirement. This account has certain restrictions on withdrawals and provides tax benefits under section 80C and 80CCD(1) of the Income Tax Act, 1961.
- Tier-II Account: This is an optional account that can be opened by individuals who have a Tier-I account. It is a voluntary savings account that allows individuals to withdraw their savings as and when required. Unlike Tier-I, there are no restrictions on withdrawals from this account. However, it does not offer tax benefits like a Tier-I account.
Note: Those who joined the National Pension Scheme before 1st January 2004 have a third type of account called Tier-III, but individuals who joined after that date do not have access to it.
What are the Features of NPS Accounts?
The National Pension Scheme (NPS) stands as a cornerstone for secure retirement planning, offering a range of key features that can make it a compelling choice for potential investors. Understanding the details of the NPS pension scheme helps maximise the benefits available under this scheme.
Flexibility in Contributions
NPS allows contributors to choose the amount and frequency of their contributions, providing flexibility to adapt to varying financial situations. Whether you are investing in NPS regularly or occasionally, the scheme accommodates all types of investors.
Two-Tiered Account Structure
NPS comprises Tier I and Tier II accounts. Tier I is mandatory and focuses on long-term retirement savings, while Tier II is optional and offers flexibility for withdrawals. For those seeking Tier 1 NPS tax benefits, Tier I contributions are eligible for additional tax deductions.
Tax Benefits
Enjoy tax advantages under Section 80C and Section 80CCD of the Income Tax Act. Additionally, the maturity amount is tax-free up to a certain limit, making NPS a tax-efficient investment. The NPS contribution tax exemption can significantly reduce your taxable income, making it a popular choice for tax-conscious investors.
Wide Range of Investment Options
NPS offers a diversified portfolio with a mix of equity, fixed deposits, liquid funds, and government funds, allowing investors to tailor their investment strategy based on risk appetite. This versatility is a highlight among NPS scheme benefits, catering to different risk profiles and financial goals.
Professional Fund Management
Expert NPS fund managers handle NPS investment options, ensuring optimal returns and risk management for contributors. By investing in NPS, individuals can benefit from professional management of their retirement funds, contributing to a more secure financial future.
Portability
NPS is portable across jobs and locations, providing continuity in retirement planning even when changing employers or relocating. This feature makes the NPS pension scheme a highly adaptable retirement solution.
Annuity Options at Maturity
At retirement, contributors can choose from various annuity options to receive a regular pension, providing financial stability during post-retirement years. The flexibility in NPS pension choices allows for tailored retirement income solutions.
Online Accessibility
The National Pension Scheme offers an online platform for easy account access, monitoring, and management, enhancing user convenience. Features like NPS statement download and checking NPS balance make managing your retirement savings straightforward and accessible.
Understanding these features empowers individuals to make informed decisions about their retirement savings, ensuring a financially secure future. For more information on how to apply for NPS, contribution limits, and tax implications, one can visit the official portals or consult financial advisors.
What is the Objective of a National Pension Scheme?
Creating a robust financial plan for retirement is paramount in ensuring a secure post-work life. The National Pension Scheme (NPS) serves as a pivotal instrument introduced by the Indian Government to cater to the evolving needs of the growing senior citizen population. Understanding NPS full form and objectives can help investors make informed decisions about their retirement savings. The primary objectives of a National Pension Scheme account include:
Systemised Savings
National Pension Scheme details highlight its focus on encouraging disciplined savings during an individual’s working years. This systematic approach fosters financial discipline, instilling the habit of contributing to NPS regularly and setting aside pension funds for the future. The NPS minimum tenure ensures that savings are accumulated over a significant period, enhancing the retirement corpus.
Expenditure Fulfilment
The scheme aims to facilitate the creation of a substantial corpus, ensuring that individuals can meet their post-retirement expenditure requirements. This not only guarantees financial security but also minimises the challenges associated with life after retirement. Understanding what NPS is and its benefits reveals how it supports financial independence in retirement.
Government-Backed Security
Being a government-backed initiative, NPS schemes offer a layer of security to the invested capital. This assurance is crucial in building trust among individuals seeking a reliable avenue for their retirement savings. Questions like “Is NPS tax free on maturity?” often arise, and it’s important to note that tax on NPS maturity is limited under specific conditions, adding to its appeal as a secure investment.
Flexible Investment Options
NPS provides a range of investment options, allowing account holders to tailor their portfolios according to risk preferences. This flexibility ensures that individuals can align their investments with their financial goals and risk tolerance. Exploring NPS types and how to do NPS investment can help in optimising the benefits according to one’s risk appetite and investment horizon.
The NPS also offers tax benefits, including NPS scheme tax benefits, making it an attractive option for those seeking tax-efficient retirement planning. For easy access and management of your NPS account, platforms like enps.nsdl.com offer online services that provide seamless operations, including NPS declaration and account monitoring.
Understanding these objectives of the National Pension Service empowers individuals to strategically plan their retirement, making NPS a comprehensive tool for ensuring a financially secure future.
What is the NPS Eligibility and Enrollment Process?
If you are wondering who is eligible for NPS, we’ll answer that for you. The National Pension Scheme is open to all Indian citizens between the ages of 18 and 70 years. Non-Resident Indians (NRIs) are also eligible to join National Pension Scheme. They are subject to certain conditions regarding the National Pension Scheme eligibility. The enrollment process for the NPS scheme is quite simple. An individual can enrol in National Pension Scheme by following the steps mentioned below:
- Choose the type of account you want to open: Tier I or Tier II. Tier I is a mandatory account while Tier II is a voluntary savings account.
- Choose a suitable point of presence (PoP) that is authorised by the Pension Fund Regulatory Development Authority (PFRDA) to act as an intermediary for NPS account opening.
- Fill out the registration form, providing personal details and bank account information.
- Submit the form along with other personal documents like proof of identity and address to the PoP.
- Make the initial minimum NPS contribution to National Pension Scheme via cheque or a demand draft.
- Start contributing regularly to your NPS account as per your convenience.
How to Open a National Pension Scheme Account?
The National Pension Scheme is a government-backed retirement savings scheme that offers attractive interest rates and tax national pension scheme benefits. It is essentially important that one at least knows how to invest in National Pension Scheme. Here is a step-by-step guide on how to open an NPS account- online and offline.
Online Process
To open an NPS account online, you need to follow these steps:
- Go to the eNPS website.
- Click on “Registration”.
- Enter your personal details, such as your name, date of birth, PAN, and Aadhaar number.
- Upload your photograph and signature.
- Select your preferred pension fund manager.
- Make an initial contribution of Rs. 500.
- Click on “Submit”.
Once you have submitted your NPS application, you will receive an email with your Permanent Retirement Account Number (PRAN). You can use your PRAN to log in to your NPS account and start contributing.
Here are some of the documents that you will need to open an NPS account online:
- Aadhaar card
- PAN card
- Bank account details
- Photograph
- Signature
Once your KYC is verified, your NPS account will be activated, and you can start making contributions and managing your investments online through the National Pension Scheme portal.
Offline Process
To open an NPS account offline, you need to follow these steps:
- Find a Point of Presence (POP). A POP is a bank or financial institution that has been authorised by the National Pension System Trust to open NPS accounts. You can find a list of POPs on the NPS Trust website.
- Collect the registration form. You can collect the registration form from the POP. The form is available in both English and Hindi.
- Fill up the registration form. You need to provide your personal details, such as your name, address, date of birth, and PAN number. You also need to provide your bank account details.
- Submit the registration form along with the required documents. The required documents include a copy of your Aadhaar card, PAN card, and photograph.
- Pay the registration fee. The registration fee is Rs. 200.
- Get your NPS account number. Once your application is processed, you will receive your NPS account number. You can use this number to make contributions to your NPS account.
Here are the documents required to open an NPS account offline:
- Aadhaar card
- PAN card
- Passport
- Voter ID card
- Driving license
- Ration card
- Bank statement
- Proof of address
- Photograph
How to Login to Your NPS Account?
If you have created and opened your new NPS Account, you may be wondering how you can login for the first time. Well, look no further. Here is a step by step guide on how to access your NPS account. Especially for the first time through the NPS login system:
- Obtain your 12-digit PRAN by submitting required documents on the NSDL website or at Point of Presence (POP) service providers.
- Visit the NSDL CRA official portal.
- Input your PRAN, date of birth, new password, and captcha; then click submit.
- Retrieve your IPIN generated for NSDL portal national pension scheme login.
- Access the NSDL eNPS page, selecting ‘Login with PRAN/IPIN’.
- Sign in to your NPS account on the next page using your PRAN and IPIN.
Who Should Invest in NPS?
The NPS offers an excellent opportunity for early retirement planning for investors with a low-risk appetite. Securing a steady pension during retirement, particularly for those transitioning from private-sector jobs, can be a significant advantage. This systematic investment has the potential to significantly impact your post-retirement life. Salaried individuals aiming to maximise 80C deductions should also explore this scheme as well as its features and benefits.
How NPS Returns are Calculated?
National Pension System returns are calculated based on the NPS funds performance of the underlying investments made by the Pension Fund Managers (PFMs) chosen by the subscriber.
The NPS offers two investment options to subscribers – Active choice and Auto choice.
Active Choice
Under the Active choice, subscribers can choose to allocate their contributions across four different asset classes – Equity (E), Corporate Bonds (C), Government Securities (G) and Alternative Investment Funds (A) – in any proportion they desire, subject to certain limits. The returns in NPS are calculated based on the performance of the selected assets and the proportion invested in each asset class.
Auto Choice
Under the Auto choice, the allocation of funds is automatically managed based on the age of the subscriber. The allocation is divided into three Life Cycle Funds – Aggressive, Moderate, and Conservative. These invest in a mix of different asset classes. The allocation is managed automatically based on the subscriber’s age, with a higher proportion of equity investments for younger subscribers and a higher proportion of debt investments for older subscribers. The returns are calculated based on the performance of the Life Cycle Fund chosen by the subscriber of a NPS subscription.
The PFMs managing the funds are regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and are required to disclose the performance of the funds on a regular basis. Consequently, NPS is regulated by PDRDA, as well. The NPS average returns earned by the subscriber are calculated as the difference between the contributions made and the amount received at the time of withdrawal or annuitisation.
You can also use the smallcase NPS calculator to easily calculate your NPS returns online.
What are the Benefits of NPS?
The National Pension Scheme offers several benefits to its subscribers. This includes tax benefits, market-linked returns, and flexibility in investment options. Having an NPS accounts means there would be added benefits to the same. Let’s explore some of them:
- Market-linked Returns: NPS investments are market-linked, and the returns on NPS investments are based on the performance of the underlying NPS funds. The NPS returns on investments have historically been higher than traditional savings accounts and fixed deposits.
- Flexibility in Investment Options: NPS scheme offers subscribers the flexibility to choose their investment options based on their risk appetite and investment goals. Subscribers can choose from two investment options- active choice and auto choice.
- NPS Interest Rate: All this talk about NPS must have raised the question of, ‘What is NPS interest rate?’ in your mind. Well, let’s answer it. The National Pension Scheme interest rate is determined by the performance of the underlying NPS funds. The average returns on National Pension Scheme investments have been around 10% over the last few years, making it an attractive investment option for long-term financial planning
What are the Benefits of NPS for Corporate Employees?
Corporate employees can benefit from the National Pension Scheme in several ways, with the employer also playing a crucial role in contributing to the scheme.
FACT: Employers can contribute up to 10% of the employee’s basic salary and dearness allowance towards the NPS account.
Here are some of the key benefits of NPS corporate model:
- NPS Tax Benefit: Corporate employees who contribute to the National Pension Scheme can avail of tax benefits under Section 80C and Section 80CCD(1B) of the Income Tax Act. This allows them to save a significant amount of tax on their income.
- Retirement Planning: NPS helps corporate employees plan for their retirement by providing a reliable and low-cost investment option. It allows them to accumulate a corpus meaning in NPS over a period of time, which they can use to generate a regular income after retirement.
- Flexibility: Corporate employees can choose from various investment options under the NPS scheme, including equity, debt, and government securities. This allows them to invest according to their risk appetite and financial goals.
- Low Cost: NPS has a very low cost structure, with the fund management charges being one of the lowest in the industry with ascertained NPS Fund Manager performance. This makes it an attractive option for corporate employees looking to invest in a cost-effective manner.
What is the Difference Between Corporate NPS and Individual NPS Accounts?
Here we have listed some of the basic differences between Corporate NPS and Individual NPS account for better understanding.
| Parameters | Corporate NPS Account | Individual NPS Account |
| Eligibility | Employers and employees of corporate entities | Any Indian citizen aged between 18 and 65 years |
| Investment Options | Only a Tier-I account is available | Both Tier-I and Tier-II accounts are available |
| Contribution Limits | No limit on the contribution amount | Maximum annual contribution limit of Rs. 2 lakhs |
| Contribution Source | Employer, employee, or both | Only the account holder can make contributions |
| Tax Benefits | Tax deduction for both employer and employee contributions | Tax deduction for personal contributions under Section 80CCD(1B) |
| Withdrawals | Partial withdrawals are allowed for certain purposes | Limited withdrawals are allowed only after the completion of 3 years |
| Portability | Account can be transferred to another employer’s corporate NPS account | Account can be transferred to another individual NPS account |
| Annuity Purchase | The employer can purchase an annuity plan on behalf of the employee | The account holder must purchase an annuity plan upon retirement |
What are the Benefits of NPS for Government Employees?
National Pension Scheme for government employees is known as the National Pension Scheme for Government Sector or NPS-G. It is a pension scheme specifically designed for employees of the central government, state government, and other government organisations.
Under the National Pension Scheme for Government Sector, government employees can contribute towards their retirement savings and receive a pension after retirement. They can access their NPS account through the Central Recordkeeping Agency (CRA) system and can monitor their contributions, investment performance, and make withdrawal requests through the online portal.
Here are some key features of NPS for Government Sector:
Mandatory for New Employees
It is mandatory for all new government employees (except for the armed forces) who joined service on or after January 1, 2004, to become members of the NPS services.
Tier-I and Tier-II Accounts
The Tier-I account is mandatory and meant for retirement savings. Thus, the NPS tier 1 returns are guaranteed. While the Tier-II account is optional and provides flexibility in withdrawals and thus, NPS tier 2 returns are not guaranteed.
Investment Options
Under the Active choice, employees can decide how to allocate their contributions across different asset classes. Under the Auto choice, the allocation is managed based on the employee’s age.
Employer Contributions
The government also contributes towards the employee’s NPS account. The employer’s contribution is 10% of the employee’s basic salary and dearness allowance, which is deposited into the Tier-I account.
Tax Benefits
Contributions made by government employees towards the NPS India are eligible for tax benefits under Section 80CCD(1) of the Income Tax Act, 1961.
What is the Taxation Policy on NPS Accounts?
The National Pension System is a retirement savings scheme that offers tax benefits to its subscribers. The tax benefits on NPS accounts are as follows:
- Employees: Employees who contribute to NPS are eligible for a tax deduction of up to 10% of their salary (basic + DA) under Section 80 CCD(1) of the Income Tax Act, 1961. This is within the overall ceiling of Rs. 1.5 lakh under Section 80 CCE of the Income Tax Act.
- Employers: Employers who contribute to NPS on behalf of their employees are eligible for a tax deduction of up to 10% of the employee’s salary (basic + DA) under Section 80 CCD(2) of the Income Tax Act. This is over and above the deduction of Rs. 1.5 lakh available under Section 80C of the Income Tax Act.
- Self-Employed Individuals: Self-employed individuals who contribute to NPS are eligible for a tax deduction of up to 10% of their net income under Section 80 CCD(1B) of the Income Tax Act. This is over and above the deduction of Rs. 1.5 lakh available under Section 80C of the Income Tax Act.
The NPS Tax Benefits on Withdrawals are as follows:
- Withdrawals before 60 years of age: Withdrawals made before the age of 60 are taxable as per the income tax slab applicable to the subscriber.
- Withdrawals after 60 years of age: Withdrawals made after the age of 60 are tax-free up to 40% of the corpus. The remaining 60% is taxable as per the income tax slab applicable to the subscriber.
The tax benefits on National Pension System are a great way to save for retirement. By contributing to the National Pension Scheme, you can save on taxes and build a strong retirement corpus.
What are the Tax Benefits of the National Pension Scheme?
There are several types of National Pension Scheme tax benefits when one opens a NPS Account; they have been listed below:
Employee Self-Contribution Tax Benefits
- Deduct up to 10% of your pay (Basic + DA) under Section 80CCD(1), capped at Rs.1.5 lakh under Section 80CCE.
- Enjoy an additional deduction of up to Rs.50,000 under Section 80CCD(1B on your own contributions, within the overall Rs.1.5 lakh limit of Section 80CCE.
Employer Contribution Tax Benefits
Deduct up to 10% of your salary or 14% if from the Central Government under Section 80CCD(2), exceeding the Rs.1.5 lakh limit in Section 80CCE.
Tax Benefits for Self-Employed Contributors to NPS
- Deduct up to 20% of your gross income under Section 80CCD(1), capped at Rs.1.5 lakh under Section 80CCE.
- An additional deduction of up to Rs.50,000 under Section 80CCD(1B), within the overall Rs.1.5 lakh limit of Section 80CCE.
Other NPS Tax Benefits
- Partial withdrawals are tax-exempt up to 25% of your contribution, following PFRDA NPS guidelines in Section 10(12B).
- Enjoy tax exemption on annuity purchases at 60 under Section 80CCD(5), but subsequent annuity income is taxed under Section 80CCD(3).
- Employer contributions earn a deduction, up to 10% of the employee’s salary (Basic + DA), a savvy ‘Business Cost’ on the Profit & Loss Account under section 36(1)(iv)(a). You can now maximise your corporate breaks with NPS.
- Section 10 grants tax exemption on a lump sum withdrawal of 60% of your National Pension Scheme funds at 60 or superannuation.
All these tax benefits make National Pension Scheme triumph over many other potential investment options like Mutual Funds. To learn more, explore our article on NPS vs Mutual Funds.
What are the NPS Rules of Equity Allocation?
Employee tax benefits are available through self-contributions to the NPS. The National Pension Scheme offers various investment schemes, with Scheme E focusing on equity investments. You can allocate a maximum NPS contribution of 50% of your investment to equities and choose between auto choice and active choice for investment options.
Auto choice determines the risk profile based on your age, with older individuals having more stable and less risky investments. Active choice gives you the flexibility to decide on the scheme and distribute your investments according to your preferences. You can explore the options available with the scheme for potential financial advantages.
What is the Withdrawal and Exit Process?
The withdrawal process from the National Pension Schemes can be initiated upon reaching the age of 60. It can also be done upon the completion of 10 years of account opening, whichever is earlier. Upon maturity, these national pension scheme withdrawal rules need to be adhered to:
- Lump-Sum Withdrawal: The account holder can withdraw up to 60% of the accumulated corpus as a lump sum at maturity. The remaining 40% of the corpus must be used to purchase an annuity plan from a PFRDA-approved annuity service provider.
- Annuity Purchase: The entire corpus can be used to purchase an annuity plan from a PFRDA-approved annuity service provider. The annuity plan will provide the account holder with a regular income stream for the rest of their life.
- Combination of Lump-sum Withdrawal and Annuity Purchase: The account holder can choose to withdraw a portion of the accumulated corpus as a lump sum and use the remaining portion to purchase an annuity plan.
Conditions for Premature Withdrawal
The NPS account holder can also make premature withdrawals under certain circumstances, such as:
- Partial Withdrawal: The account holder can withdraw up to 25% of the contributions made by them. After completion of 3 years of account opening. They can make withdrawals for specific purposes such as medical treatment, higher education, home purchase, or marriage.
- Superannuation: If the account holder retires from employment after attaining the age of 60, they can withdraw up to 60% of the accumulated corpus as a lump sum and use the remaining 40% to purchase an annuity plan.
- Critical Illness: In case of a critical illness, the account holder can withdraw up to 25% of the accumulated corpus. This is also after completion of 3 years of account opening.
To Wrap It Up…
Understanding about National Pension Scheme is crucial for investors as it is a great investment option, especially for those looking to secure their retirement. With its attractive features, such as low cost, flexibility, tax benefits, and potentially high NPS returns, it offers a reliable investment avenue for individuals across various income levels. For those seeking convenience, you can easily opt for NPS online, making the process straightforward and accessible.
By investing in the National Pension Scheme, individuals can accumulate a substantial corpus for their retirement and enjoy the benefits of a regular income stream after retirement. With the option to choose between different fund managers and investment options, NPS provides the flexibility to select a plan that aligns with individual financial goals and risk appetite. It’s essential to consider the NPS maturity period and NPS tenure, which are designed to ensure long-term savings and financial stability.
Additionally, understanding factors such as the NPS interest rate yearly limit and NPS maximum investment can help investors make informed decisions about their contributions and the potential growth of their retirement fund. Overall, NPS is a reliable and effective investment tool that can help individuals secure their financial future and lead a comfortable retirement life.
FAQs
Launched in January 2004, the National Pension Scheme is a government pension scheme where individuals can contribute regularly to a pension account during their working life.
Any Indian citizen (both resident and Non-resident) between the age of 18 to 70 years can be a part of this scheme.
No, you cannot open multiple National Pension Scheme accounts. However, an individual can open one account under NPS and the other account in Atal Pension Yojna.
Yes, the subscriber has the freedom to make a switch between the two investment options. Thus, this can be done twice in a financial year.
NPS offers greater liquidity with various options for partial withdrawals. PPF allows partial withdrawals post a specific lock-in period and subject to an amount limit. In terms of taxation, NPS provides tax-free maturity withdrawals, whereas annuities require post-tax purchase.
No. National Pension Scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
The National pension scheme account reaches maturity at 60, allowing you to withdraw 60% of your savings tax-free. To exit the scheme, simply submit a fully filled withdrawal application form and necessary documents to the POP-SP.
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