What is the National Pension Scheme [NPS]? All the Details of NPS You Need to Know!

The National Pension Scheme (NPS) is a voluntary, long-term retirement savings scheme in India. It is designed to enable systematic savings for individuals to create a retirement corpus and receive a regular pension income after retirement. NPS was introduced by the Government of India in 2004 and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). As of the financial year 2023, the total assets under management in the National Pension Scheme reached approximately ₹8.9 trillion, reflecting significant growth since its inception.

The program encourages individuals to regularly invest in a pension account throughout their employment. Upon retirement, a portion of the accumulated corpus can be withdrawn, and the remaining amount is disbursed as a monthly pension to NPS account holders. This substantial growth in assets under management highlights the increasing reliance on NPS as a crucial component of retirement planning in India.

Is the National Pension Scheme (NPS) accessible to all Employees?

Initially exclusive to Central Government employees who joined after 01-01-2004, the PFRDA has now extended the NPS to all Indian citizens on a voluntary basis.

It is open to employees working in the public, private, and unorganized sectors, excluding those in the armed forces.

Who should invest in the NPS?

The National Pension Scheme (NPS) is suitable for those seeking a structured approach to retirement savings. Ideal candidates include salaried individuals desiring disciplined contributions, long-term investors willing to commit until retirement, and tax-savvy individuals benefiting from tax advantages under Sections 80C and 80CCD(1B).

NPS is beneficial to private sector employees aiming for a steady pension income post-retirement. This is also beneficial to those who want to make the most of 80C deductions.

What are the Benefits of NPS?

Long-Term Savings for Retirement:

NPS is designed to encourage disciplined long-term savings, enabling individuals to build a substantial retirement corpus over time. By consistently contributing to the scheme, participants can accumulate significant wealth, ensuring financial stability and independence during their retirement years. The structured approach helps in securing a comfortable post-retirement life.

Flexible Contributions:

NPS offers flexibility in contributions, allowing subscribers to invest regularly on a monthly or yearly basis. This adaptability ensures that individuals can align their investments with their financial capacity, making it easier to manage and sustain long-term savings goals, regardless of income fluctuations or financial commitments.

Choice of Investment Options:

Subscribers of NPS can choose their Pension Fund Manager (PFM) and allocate investments across various asset classes, including equity, corporate bonds, and government securities. This flexibility allows individuals to tailor their investment strategy to match their risk tolerance and long-term financial objectives, enhancing potential returns.

Systematic Withdrawal Options:

NPS allows subscribers to withdraw a lump sum amount (up to 60% of the corpus) at the time of retirement and use the remaining corpus to purchase an annuity.

Alternatively, the Systematic Withdrawal Plan (SWP) option allows subscribers to receive a regular stream of income post-retirement.

Portability:

NPS is fully portable, allowing subscribers to continue their investments seamlessly across different employers and locations. Whether changing jobs or moving to a new city, individuals can maintain their NPS account, ensuring continuous growth of their retirement savings without any disruption.

Professional Fund Management:

NPS funds are managed by professional Pension Fund Managers (PFMs) who make informed investment decisions based on current market conditions and the fund’s objectives. This expert management ensures that contributions are strategically invested, optimizing returns while mitigating risks for long-term growth.

Transparent and Regulated:

The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and accountability. The regulatory framework provides robust oversight, protecting investors’ interests and maintaining the integrity of the scheme. This regulation builds trust and confidence among subscribers.

Online Access and Monitoring:

NPS subscribers can conveniently access and monitor their accounts online, providing real-time insights into their contributions, fund performance, and overall portfolio. This transparency allows individuals to make informed decisions, adjust strategies as needed, and stay on track with their retirement goals.

Post-Retirement Income:

NPS ensures financial security post-retirement by allowing subscribers to purchase an annuity with their accumulated corpus. This annuity provides a regular pension income, supporting a stable and secure lifestyle in retirement, free from financial uncertainties or dependence on others for daily expenses.

Tax Benefits of NPS: [Does NPS fall under 80C Deductions?]

Section 80CCD(1):

Under Section 80CCD(1), contributions made by the individual taxpayer to their NPS account are eligible for a deduction. The maximum deduction allowed under this section is 10% of the individual’s salary (for employees).

Section 80CCD(1B):

An additional deduction of up to Rs 50,000 is available under Section 80CCD(1B) for contributions made by the individual to the NPS Tier-I account. This is over and above the limit specified under Section 80CCD(1).

Section 80C:

The overall limit for deductions under Section 80C is Rs 1.5 lakh. Contributions to NPS fall under the umbrella of Section 80C, and the combined limit of Section 80C, 80CCD(1), and 80CCD(1B) is Rs 1.5 lakh + 10% of salary (for employees).

Types of NPS accounts:

The National Pension Scheme (NPS) in India offers two main types of accounts: Tier-I and Tier-II. Each tier serves different purposes and has distinct features. Let’s explore the characteristics of each type of NPS account:

What is Corporate NPS?

A Corporate National Pension Scheme (NPS) account is designed to provide retirement benefits to employees through employer-sponsored contributions. Since its inception, the Corporate NPS has seen significant growth, with the number of corporate employees enrolled tripling from 8 lakh in March 2019 to 18 lakh as of August 2023. In this scheme, while the employer typically initiates the NPS, employee participation remains voluntary. Both employees and employers can contribute to the Corporate NPS account, with contributions eligible for tax benefits under Section 80CCD of the Income Tax Act.

Employees also have the flexibility to choose their Pension Fund Manager (PFM) and allocate contributions among various asset classes, tailoring their investment strategy to their financial goals. Additionally, Corporate NPS offers portability, allowing employees to maintain their NPS account even when they change jobs within the NPS framework, ensuring continuous growth of their retirement savings.

NPS Tax Benefits for Self-employed individuals:

Self-employed individuals contributing to the National Pension Scheme (NPS) can avail of the following tax benefits on their contributions:

• A tax deduction of up to 20% of their gross income under Section 80CCD(1), with a total limit of Rs.1.5 lakh under Section 80CCE.

• An additional tax deduction of up to Rs.50,000 under Section 80CCD(1B), which is separate from the overall limit of Rs.1.5 lakh under Section 80CCE.

What is a Corporate NPS Account?

A Corporate National Pension Scheme (NPS) account is a specialized variant of the NPS that is designed for employees of corporate entities. In a Corporate NPS, an employer (corporate entity) can facilitate and contribute to the retirement savings of its employees by setting up a corporate NPS account.

Here are the key features of a Corporate NPS account:

Employer-Initiated Scheme:

The Corporate NPS is a retirement savings scheme initiated and sponsored by the employer, designed specifically for the benefit of its employees. This employer-driven approach encourages a structured retirement plan, ensuring that employees have a reliable avenue to accumulate a substantial retirement corpus over time.

Voluntary Participation:

Although the Corporate NPS is employer-initiated, participation is typically voluntary, giving employees the choice to join the scheme. Employees who opt-in can contribute towards their retirement savings, benefiting from tax advantages and long-term growth while having control over their investment choices within the NPS framework.

Employee and Employer Contributions:

Both employees and employers can contribute to the Corporate NPS account. Employee contributions are deducted from their salary, and employers may make additional contributions as part of the overall employee benefits package.

Portability:

One of the key features of the Corporate NPS is its portability. Employees can continue contributing to their NPS account even if they change jobs, as long as their new employer is within the NPS framework. This ensures the seamless continuation of retirement savings without any disruption.

Flexible Withdrawal Options:

Corporate NPS accounts follow similar withdrawal and annuity rules as individual NPS accounts. Employees have the option to withdraw a portion of the corpus and use the remaining amount to purchase an annuity for a regular pension.

Eligibility criteria for NPS:

The National Pension Scheme (NPS) in India is open to a wide range of individuals, including both employed and self-employed individuals. Here are the general eligibility criteria for joining the NPS:

• NPS is open to individuals between the ages of 18 and 70
• Indian residents, as well as Non-Resident Indians (NRIs), are eligible to join the NPS.
• NPS is available to both salaried individuals (including government employees) and self-employed individuals.
• Individuals can join NPS on a voluntary basis. It is not mandatory for everyone, and participation is based on the individual’s choice to plan for retirement savings.

How can you Open an NPS account?

Opening a National Pension Scheme (NPS) account in India involves a few steps. Here’s a general guide on how to open an NPS account:

Individual NPS Account:

Choose a Point of Presence (PoP):

Select a bank, financial institution, or other entities registered as Points of Presence (PoPs) to assist in the NPS account opening process. PoPs act as intermediaries and help individuals in subscribing to the NPS.

Get the Application Form:

Obtain the NPS application form from the selected PoP or download it from the official website of the NPS or the PoP.

Fill in the Application Form:

Complete the application form with accurate personal details, including name, address, contact information, PAN, nominee details, and other required information.

Submit KYC Documents:

Attach copies of the required KYC (Know Your Customer) documents, such as proof of identity, proof of address, date of birth proof, PAN card, passport-size photograph, and bank account details.

Nomination Form:

Fill in the nomination form with details of the nominee(s) who will receive the benefits in case of the subscriber’s demise.

Visit PoP for In-Person Verification (IPV):

Visit the selected PoP to complete the in-person verification (IPV) process, where your identity will be verified in person.

Make Initial Contribution:

Make the initial contribution to your NPS account. The minimum contribution amount may vary, so check with the PoP for specific details. Typically it is not less than Rs.500 or Rs.250 monthly or Rs. 1,000 annually.

Receive PRAN (Permanent Retirement Account Number):

Once the account is successfully opened, you will receive a PRAN, which is a unique identification number for your NPS account.

Corporate NPS Account (For Employers/Employees):

Employer’s Role:

If your employer offers NPS as part of the employee benefits, the employer may facilitate the account opening process.

Provide Employee Details:

Employers may collect necessary details from employees, including KYC documents and the choice of investment options.

Submission to Nodal Office:

The employer or the nodal office may submit the necessary documents and contributions to the NPS Central Recordkeeping Agency (CRA).

Allocation of PRAN:

Once processed, employees will be allocated PRANs, and individual NPS accounts will be created.

What are the subsequent actions to be taken after initiating the opening of an NPS account?

Choose Pension Fund Manager (PFM):

Select a Pension Fund Manager (PFM) based on your risk tolerance, investment preferences, and performance track record. NPS offers multiple PFMs, and you have the flexibility to switch between them if needed.

Nominate Beneficiaries:

Nominate individuals who will receive the benefits of your NPS account in the event of your demise. Keep your nominee information updated in case of life events or changes in beneficiaries.

Make Regular Contributions:

Continue making regular contributions to your NPS account to ensure consistent and disciplined savings for your retirement. You can set up automatic contributions for convenience.

Monitor Performance:

Keep track of the performance of your NPS investments. Regularly review your NPS statements to assess the growth of your retirement corpus and adjust your investment strategy if needed.

Tax Planning:

Leverage the tax benefits offered by NPS. Understand the tax implications of contributions, withdrawals, and annuity income. Stay informed about any changes in tax regulations related to NPS.

Plan for Withdrawals:

If needed, plan for partial withdrawals from your Tier-I NPS account for specific purposes like higher education, home purchase, or critical illness. Ensure that you adhere to the withdrawal conditions.

What are the requirements for withdrawal of NPS?

The National Pension Scheme (NPS) allows subscribers to make withdrawals under certain conditions.

Upon Superannuation (Retirement):

At the age of 60, a subscriber can exit from NPS. At least 40% of the accumulated corpus must be used to purchase an annuity, providing a regular pension income. The remaining 60% can be withdrawn as a lump sum.

Exit in Case of Disability or Death:

In the case of disability of the subscriber, the entire accumulated corpus can be withdrawn. In the case of the subscriber’s demise, the entire corpus is paid to the nominee/legal heir.

Can the NPS account be closed Prematurely?

Premature exit from the Tier-I account is allowed after completing a minimum of 10 years in the NPS. In such cases, at least 80% of the accumulated corpus must be used to purchase an annuity, and the remaining 20% can be withdrawn as a lump sum.

Withdrawals from the Tier-II account are not restricted, and subscribers can make withdrawals as per their liquidity needs. The Tier-II account operates independently of the Tier-I account, providing greater flexibility.

Pension Fund Managers in India:

Currently, there are 10 managers overseeing pension funds in the country:

1. SBI Pension Funds Pvt. Ltd.

2. LIC Pension Fund Ltd.

3. UTI Retirement Solutions Ltd.

4. HDFC Pension Management Co. Ltd.

5. ICICI Prudential Pension Fund Management Co. Ltd.

6. Kotak Mahindra Pension Fund Ltd.

7. Aditya Birla Sunlife Pension Management Ltd.

8. Tata Pension Management Ltd.

9. Max Life Pension Fund Management Ltd.

10. Axis Pension Fund Management Ltd.

FAQs:

1. Can you make NPS contributions monthly?

Yes, individuals can make monthly contributions to the National Pension Scheme (NPS). NPS allows for regular and systematic contributions, making it flexible for individuals to invest on a monthly basis. This can be particularly convenient for individuals who want to plan for their retirement through systematic savings.

2. What are the required documents to open an NPS account?

To open a National Pension Scheme (NPS) account, you are required to submit certain documents for verification and KYC (Know Your Customer) purposes.

Proof of Identity (Any one of the following):

• Aadhaar card
• Passport
• Voter ID card
• Driving license
• PAN card

Proof of Address (Any one of the following):

• Aadhaar card
• Passport
• Voter ID card
• Utility bill (electricity, water, gas, landline telephone, etc.)
• Bank statement or passbook
• Rent agreement

Date of Birth Proof (Any one of the following):

• Birth certificate
• Passport
• PAN card
• Matriculation certificate
• Aadhaar card

Photograph: Recent passport-size photograph of the applicant.

PAN Card: Permanent Account Number (PAN) card is required for NPS registration.

Bank Account Details: A canceled cheque or a copy of the first page of the passbook showing the account holder’s name, account number, and IFSC code.

Duly Filled Application Form: The NPS application form, can be obtained from the Point of Presence (PoP) or registered branches of banks, or downloaded from the official NPS website.

Nomination Form: The nomination form specifying the details of the nominee(s) and their relationship with the subscriber.

KYC Compliance: Compliance with the KYC norms, including in-person verification (IPV), as required by the respective Points of Presence (PoPs).

Corporate Authorization (For Corporate NPS): In the case of Corporate NPS, additional documents such as a board resolution and authorization letter from the employer may be required.

3. Can NPS contributions be paid by credit card?

NPS contributions are typically made through electronic funds transfer (EFT), net banking, standing instructions, or physical payments at designated bank branches. Credit cards are generally not accepted as a mode of payment for NPS contributions.

4. Can NPS account be opened online?

Yes, you can open an NPS (National Pension Scheme) account online. The process involves selecting a Point of Presence (PoP) that offers online account opening services and completing the application through the online platform- enps.nsdl.com.

Initiating the online account opening process at enps.nsdl.com is simplified when you link your account to your PAN, Aadhaar, and mobile number. The registration can be authenticated by verifying the OTP sent to your mobile, resulting in the generation of a PRAN (Permanent Retirement Account Number). This PRAN can be utilized for accessing your NPS account through login.

5. Can you make a partial withdrawal from Tier I NPS Account?

There are certain exceptional circumstances under which partial withdrawals are permitted before the age of 60:

• Critical Illness
• Higher Education or Marriage
• Purchase of a Residential Property

6. Can you open an NPS account as a joint account?

The National Pension Scheme (NPS) primarily supports the individual ownership of accounts. This means that NPS accounts are typically opened and maintained on an individual basis, and joint ownership is not a standard feature for NPS accounts.

7. Is NPS a good investment?

The National Pension Scheme (NPS) offers a tax-efficient and disciplined approach to long-term retirement savings, making it a viable option for individuals seeking to build a retirement corpus.

With tax benefits on contributions and flexibility in choosing investment options, NPS caters to diverse financial goals. Professional fund management, along with the option to change the fund manager, adds a layer of security.

7. Which NPS generates the highest returns?

Top Performing NPS Fund Managers – Central Government Scheme

Best Performing NPS Fund Managers 2023 – State Government Schemes

Conclusion:

The National Pension Scheme (NPS) stands as a robust investment avenue, offering diversified portfolios, tax benefits, and portability. With options like online account opening and a range of Pension Fund Managers delivering consistent returns, NPS caters to a broad investor base.

Its structured approach, coupled with flexibility and tax efficiency, makes it an attractive choice for long-term retirement planning. NPS addresses the evolving financial needs of individuals, positioning itself as a reliable and viable investment vehicle for those seeking a secure and well-managed pathway to build a sustainable retirement corpus.

These tips are brought to you by HappyWise Financial Services.

If you need any assistance with organizing your finances or want to discuss your investment options, feel free to connect through Email or Whatsapp.

Disclaimer: Some parts of this article may have been generated or modified using Generative AI. This article is not intended as financial or investment advice; its objective is to share information. Readers are encouraged to conduct their own research and consult with a financial planner before making any financial decisions.

References:

What is National Pension Scheme, Benefits, Eligibility and Returns

Top Performing NPS Schemes 2024