NPS: National Pension Scheme, All You Need to Know

5 mins read
by Angel One

A tension-free retirement life is everyone’s goal. A sizable retirement corpus can be created if you carefully invest in a secure scheme in your working years. One of India’s popular retirement investment options is National Pension Scheme (NPS). Here, we are to explain everything you need to know about NPS. Read along to know if NPS can serve the needs of your retirement plan.

What is NPS?

NPS (National Pension System) is a defined contribution based pension scheme launched by the Government of India with the following objectives:

  • To provide old age income
  • Reasonable market-based returns over the long run
  • Extend old age security coverage to all citizens
  • Tax benefits

It is based on a unique Permanent Retirement Account Number (PRAN) which is allotted to each subscriber upon joining NPS.

Introduced in 2004, NPS was previously available only for the Central Government employees. However, it was made available for all Indian citizens in 2009. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Unique features of NPS

Who can join NPS?

Any Indian citizen between 18 and 60 years can join NPS. The only condition is that the person must comply with Know Your Customer (KYC) norms.

Types of accounts in NPS

There are 2 types of NPS accounts:

  1. Tier-1 account
  2. Tier-2 account
Category Tier-1 account Tier-2 account
Subscription Mandatory Voluntary
Initial contribution ₹ 500 ₹ 1000
Minimum contribution/year ₹ 1000 ₹ 250
Maximum contribution No limit No limit
Withdrawal Restricted Allowed
Tax Benefits Available Unavailable

Investment Options in NPS

NPS offers you the flexibility to select the investment strategy, professionally managed Pension Fund Managers as per your choice. You need to choose one among the eight Pension Fund Managers and your choice of investment ( Auto or Active) under four asset classes:

  • Equities
  • Corporate Bonds
  • Government Securities
  • Alternative Investment Funds

Click here to learn more about the PFMs and the type of investment choices available with NPS.

Tax Benefits under NPS

Tax Benefit available to Individuals:

Any individual who is a subscriber of NPS can claim tax benefit under Sec 80 CCD (1) within the overall ceiling of ₹1.5 lakh under Sec 80 CCE.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)

An additional deduction for investment up to ₹ 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of ₹1.5 lakh available under section 80C of the Income Tax Act, 1961.

Exit from NPS

One can exit from the NPS scheme after 10 years of account opening or on the attainment of retirement age

Pre-mature Exit:

  • Exit before attaining the age of retirement/60 years of age
  • Up to 20% of the corpus can be withdrawn in lumpsum
  • Balance 80% amount to be invested in annuity
  • If corpus < ₹ 2.5 lakh, one can withdraw the entire corpus

Exit on retirement

  • Exit when a subscriber retires/attains 60 years of age
  • Up to 60% of the corpus can be withdrawn in lumpsum
  • Balance 40% amount to be invested in annuity.
  • If corpus < ₹ 5 lakh, one can withdraw the entire corpus
  • Upon exit at the retirement age i.e.60 years, subscriber can avail of either of the following flexibilities:
  1. Continuation of NPS account: Subscriber can continue to contribute to NPS account beyond the age of 60 years/superannuation (up to 70 years). This contribution beyond 60 is also eligible for exclusive tax benefits under NPS.
  2. Deferment (Annuity as well as Lump sum amount): Subscriber can defer Withdrawal and stay invested in NPS up to 70 years of age. Subscribers can opt for any of the following:
  • defer only lump-sum withdrawal
  • defer only annuity
  • defer both lump-sum as well as annuity
  1. Start your Pension: If a subscriber does not wish to continue/defer the NPS account, he/she can exit from NPS.

Note: Upon the death of the subscriber, the entire accumulated pension corpus (100%) would be paid to the nominee/legal heir of the subscriber.

Partial withdrawal from NPS

The following conditions have to be fulfilled for premature withdrawal from NPS

  1. Subscriber should be in NPS at least for 3 years
  2. Withdrawal amount will not exceed 25% of the contributions made by the subscriber
  3. Withdrawal can happen a maximum of 3 times during the entire tenure of the subscription.
  4. Withdrawal is allowed only for the specified reasons, for example;
  • Higher education of children
  • Marriage of children
  • For the purchase/construction of a residential house (in specified conditions)
  • For treatment of critical illnesses, etc.

NPS SIP and same-day NAV

One of the standalone features of NPS that makes it attractive when compared to other retirement products are

  • Same day NAV
  • SIP like in mutual funds.

With the D-Remit facility, you can activate SIP in NPS and also get the same-day NAV for your investment.

Charges in NPS

The applicable transaction and service charges in NPS are minimal compared to other funds.

Following are the maximum management fees permissible for different slabs of Assets Under Management (AUM) by Pension Fund Managers

Slabs of AUM managed by the Pension Fund ( in crores) Maximum Investment Management Fee (IMF)
Up to Rs 10,000 0.09%
Rs 10,001 – Rs 50,000 0.06%
Rs 50,001 – Rs 1,50,000 0.05%
Rs 1,50,000 and above 0.03%

With less than 0.1% management fees, NPS is the lowest cost managed fund compared to the asset management companies that charge an expense ratio ranging from 0.50% to 1.50% for Mutual Funds.

NPS is indeed a long-term investment product, designed to keep pension in mind after retirement. However, as a product, it has evolved in recent times and addressed almost every aspect of our investment, whether it is for retirement, tax saving, short-term goals, etc. Now that you are aware of how NPS works, if you find it a suitable retirement plan for you, you can learn how to apply for NPS with Angel One here.

Disclaimer: This blog is exclusively for educational purposes.