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

What is 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).

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 Upon retirement, a portion of the accumulated corpus can be withdrawn, and the remaining amount is disbursed as a monthly pension to NPS account holders.

Source: Acko Insurance

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.

Benefits of NPS:

Long-Term Savings for Retirement:

NPS is designed to encourage systematic and disciplined long-term savings, helping individuals accumulate a significant corpus for their retirement.

Flexible Contributions:

Subscribers can contribute to NPS regularly on a monthly or yearly basis, making it convenient for individuals to invest based on their financial capacity.

Choice of Investment Options:

NPS provides subscribers with the flexibility to choose their Pension Fund Manager (PFM) and allocate their contributions among various asset classes, including equity, corporate bonds, and government securities.

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 portable across employers and locations, allowing individuals to continue their investments even if they change jobs or move to a different city.

Professional Fund Management:

NPS funds are managed by professional Pension Fund Managers (PFMs) who make investment decisions based on market conditions and the investment objectives of the fund.

Transparent and Regulated:

The National Pension Scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency, accountability, and regulatory oversight.

Online Access and Monitoring:

Subscribers can easily access and monitor their NPS accounts online, allowing them to keep track of their contributions, fund performance, and overall portfolio.

Post-Retirement Income:

The NPS allows subscribers to receive a regular pension income through the purchase of an annuity, providing financial security in retirement.

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).

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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:

FeatureTier-I AccountTier-II Account
Account TypeMandatory Pension AccountVoluntary Savings Account
PurposeRetirement corpus and long-term savings for pensionVoluntary savings with greater liquidity
Withdrawal RestrictionsRestricted with specific conditionsNo restrictions on withdrawals
Partial WithdrawalsAllowed for specific purposes with limitsSubscribers can withdraw funds as needed
Compulsory Annuity PurchaseYes (at least 40% of corpus)No compulsory annuity purchase requirement
Tax BenefitsEligible for tax benefits under Section 80CCDNo additional tax benefits beyond Tier-I account
Exclusive Tax BenefitUp to Rs 50,000 under Section 80CCD(1B)Not applicable
Voluntary SavingsNot applicableAvailable
Minimum Balance RequirementNot applicableMay have a minimum balance requirement and charges
Can Exist IndependentlyNoYes
Withdrawal ChannelsRestricted channelsVarious channels, including online facilities provided by PFMs

What is Corporate NPS?

A Corporate National Pension Scheme (NPS) account is established by employers for the retirement benefit of their employees. In this scheme, employer sponsorship initiates the NPS, but employee participation is typically 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 have the flexibility to choose their Pension Fund Manager (PFM) and allocate contributions among various asset classes.

Corporate NPS offers portability, allowing employees to continue their NPS account even if they change jobs within the NPS framework.

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:

  1. 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.
  2. 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 initiated and sponsored by the employer for the benefit of its employees.

Voluntary Participation:

While the employer may initiate the scheme, employee participation in the Corporate NPS is typically voluntary. Employees can choose to join the NPS and contribute to their retirement savings.

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:

The NPS provides portability, allowing employees to continue their NPS account even if they change jobs within the NPS framework. This ensures the continuity of retirement savings.

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

Pension Fund ManagersSBI Pension FundUTI Retirement SolutionsLIC Pension FundBenchmark Return
Net Asset Value (NAV) as of 15th Dec 202342.190740.840741.1354
Returns (%)
1-year9.189.159.309.33
3-year6.686.776.966.84
5-year9.069.029.099.38
7-year8.198.248.218.31
10-year9.929.849.859.93
Since Inception9.599.379.42
Source: ClearTax

Best Performing NPS Fund Managers 2023 – State Government Schemes

Pension Fund ManagersSBI Pension FundLIC Pension FundUTI Retirement SolutionsBenchmark Return
Net Asset Value (NAV) as of 15th Dec 202336.176536.581936.3304
Returns (%)
1-year9.119.249.139.33
3-year6.596.886.746.84
5-year9.039.029.019.38
7-year8.118.138.178.31
10-year9.959.839.839.93
Since Inception9.289.379.32
Source: ClearTax

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 expert Financial Planners at HappyWise Financial Services.

If you need any assistance in choosing the Best Insurance Policy for your needs or want to discuss your investment options, feel free to connect through Email or Whatsapp. They can help you create a customized plan that meets your unique needs and goals.

References:

What is National Pension Scheme, Benefits, Eligibility and Returns

Top Performing NPS Schemes 2024

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