The National Pension System (NPS) is an Indian federal government-sponsored pension cum investment scheme aimed at protecting the citizens of India as they reach their old age. It is a pure retirement pension plan, in which you can get a stable income with tax benefits after your retirement, and with a little optional risk one can increase the returns to a great extent.. The NPS is a low-cost pension product, which is professionally managed by pension funds regulated by the central government’s Pension Fund Regulatory and Development Authority of India.
What Is NPS
The National Pension System, as the name implies, is a retirement financial security plan initiated by the Central Government. It falls under the jurisdiction of the Pension Fund Regulatory and Development Authority (PFRDA). The scheme encourages Indian citizens to invest in the NPS account every year while they are working. They can withdraw a percentage of the amount invested in the scheme post-retirement.
During the retirement years, the remaining amount will be disbursed as a monthly pension to the account holder. Opening an NPS account is an easy online process, and managing it, including NPS login, statement download, and account management, is also simple. Furthermore, making an NPS investment online comes with several tax benefits under Section 80C and Section 80CCD of the Income Tax Act.
Who Can Avail the NPS
The central recordkeeping agency for the NPS details two broad classifications for Indian residents in the age group of 18-65 years as on the date of submission of NPS application.
The Central Government had introduced the NPS with effect from Jan. 1, 2004, with exceptions in the armed forces.
All the employees of Central Autonomous Bodies (CAB) who have joined on or after the date of NPS introduction are mandatorily covered under the government sector of the NPS.
Central government or the CAB employees contribute towards pension from their monthly salary along with a matching contribution from their employer.
Subsequent to the Central Government, various State Governments adopted this architecture and implemented the NPS with effect from different dates.
A State Autonomous Body (SAB) can also adopt NPS if the concerned State Government or a Union Territory has adopted the NPS architecture and initiated implementation of the same.
State government or the SAB employees also contribute towards pension from their monthly salary along with a matching contribution from their employer.
Non-Government Sector or Private Sector
The NPS corporate sector model is the customized version of the NPS to suit various organizations and their employees to adopt NPS as an organized entity within purview of their employer-employee relationship.
All Citizens of India
Any individual not being covered by any of the above sectors has been allowed to join the NPS architecture under the All Citizens of India Sector from May 1, 2009.
What Types NPS Accounts Can You Choose From
The NPS can be availed under two options; Tier I, which is a pure pension plan and Tier II, which is an investment plan with some degree of market risk involved.
Let’s understand how they both work:
NPS Tier I
The investment in a Tier I NPS account is without any risk involved and comes with certain benefits.
Opening of NPS Tier I Account
Upon successful enrolment to the NPS, a Permanent Retirement Account Number (PRAN) is allotted to the subscriber. The subscriber contributes periodically and regularly towards NPS during their working life to create the corpus for retirement.
The minimum amount required to open a NPS account is INR 500 and each subscriber can have a maximum of one account.
An individual with a NPS account is expected to deposit a minimum annual contribution of INR 1000. There is no upper limit to the amount of money to be deposited.
NPS Tier I is a tax-free investment exempted from tax at all stages of investment and return. The invested amount, interest earned on it and the total amount withdrawn at the end of the scheme is all tax free.
You can avail tax benefits of up to INR 2 lakh investment in a NPS Tier I account such that:
- Depositing anywhere up to INR 1.5 lakh is non-taxable under Income Tax Section – 80CCD
- Starting from FY 2015-16, individuals have been permitted an additional amount of INR 50,000 that can be claimed under tax deduction under section 80 CCD (1B).
Any/all money deposited beyond a contribution exceeding INR 2 lakh is taxable.
Upon retirement or exit from the scheme, the corpus is made available to the subscriber with the mandate that some portion of the corpus must be invested into annuity to provide a monthly pension post retirement or exit from the scheme.
One can take out up to 60% of their total investment after the age of 60. This 60% investment will be considered tax free.
For NPS Tier I, the interest rate that subscribers get is between 8% to 10%.
The National Pension System Trust, taking care of the assets and funds under the NPS in the best interest of the subscribers on behalf of the PFRDA, enlists a pension calculator that illustrates the tentative pension and lump sum amount a NPS subscriber may expect on maturity or 60 years of age.
This figure is calculated based on regular monthly contributions, percentage of corpus reinvested for purchasing annuity and assumed rates in respect of returns on investment and annuity selected for.
An individual can prematurely withdraw their contribution from their NPS account after the completion of three years to up to 25% of the total sum deposited. This will be added to your annual income and taxed as per the slab of that financial year.
This withdrawal can be done thrice before the age of the scheme maturing and only for very important reasons that need to be declared.
NPS Tier II
NPS Tier II is a pure investment plan and does not have tax benefits similar to the NPS Tier I plan. This plan can be compared to an open-ended mutual fund.
Opening of NPS Tier II Account
Some basic rules apply to the opening of a NPS Tier II account. You need to have a NPS Tier I plan in order to start a NPS Tier II plan. Subscribers are free to switch from Tier I to a Tier II plan and vice versa.
You need to deposit a minimum of INR 1000 to start this account and are free to make contributions as you like.
There are no compulsions to deposit any money on a yearly basis and no upper limit to the amount of contribution a subscriber may like to make.
One only needs to note they can deposit money in multiples of INR 250. For example: INR 500, INR 750, INR 1000 and so on.
Upon retirement or exit from the scheme, the corpus is made available to the subscriber for withdrawal, which is taxable and any money earned from this account will be added to the subscriber’s yearly taxable income.
You can deposit or withdraw contributions made at your will whenever you want to. No penalty is imposed on withdrawals.
Different types of investments reap different percentages of returns. For a NPS Tier II account, a subscriber is likely to earn interest in the range of:
- Equity 14% to 15%
- Corporate bonds 9% to 10%
- Government securities 7% to 8%
Open an NPS Account Online/Offline
You can open an NPS account online as well as offline. Let us take a look at the procedure to open the account through both methods one by one.
Online Method to Open NPS Account
Here is how to start NPS using the online method:
- Login to the NPS official website and register for the account.
- Link your mobile number, Permanent Account Number (PAN), and Aadhaar Card Number with your NPS account.
- Verify the registration by entering the OTP received on your registered mobile number.
- Once the registration formalities are completed, you will receive a Permanent Retirement Account Number (PRAN).
- Click open the NPS portal and use the PRAN number to log into your NPS account.
- NPS online payments can be made by using this login id and password.
Offline Method to Open an NPS Account
Here is how to apply for an NPS account using the offline method:
- Complete a subscriber form and provide it along with your KYC documents at the nearest Point of Presence (PoP).
- Next, deposit a minimum of INR 500 to open a tier I account. You will receive your Permanent Retirement Account Number (PRAN) after the completion of these formalities. An initial amount of INR 1,000 needs to be deposited for the tier II account at the time of registration.
- Once you have received your PRAN number and password, you can start using your NPS account. However, a one-time registration fee of INR 125 needs to be deposited for this purpose.
- You can make NPS contributions online moving forward.
What is the Eligibility for NPS Account Opening
Initially, the NPS scheme was available only to Central Government employees. But this is not the case now. PFRDA has made it available for others as well. Any public/private employee or business owner can apply for NPS online or offline. Hence, this is a national pension scheme for private employees and businessmen as well. Let us take a closer look at the eligibility criteria of this scheme:
- The applicant must be a citizen of India. Both resident and non-resident Indians can apply for the scheme. Those belonging to the Overseas Citizen of India (OCI) category can also apply.
- He/she must be aged between 18-70 years on the date of submission of the NPS application.
- He/she must be legally capable of executing a contract as suggested in the Indian Contract Act.
How can an account holder make modifications to NPS account details?
An account holder can submit a written request to the POP-SP for making changes in NPS account details. Certain changes can also be updated online on the NPS website or through its mobile application.
How to get a duplicate PRAN (Permanent Retirement Account Number) card for my NPS account?
To get a duplicate PRAN card, the account holder must fill out and submit an S2 form to the respective POP-SP. Thereafter, the POP-SP verifies the form and enters the request in the CRA system. Next, the CRA processes the request and prints a new PRAN Card for the account holder.
Is it mandatory to download the NPS app to manage the NPS account?
While it is not compulsory to download the NPS app for operating or managing your account, it is advisable to do so. You can manage your NPS account more easily by downloading this app.
What is the procedure to get the annual statement for the NPS account?
The annual statement for NPS is sent to the account holder’s registered address. You can also view the statement online by logging in to your account. There is also a provision of requesting the transaction statement through IVR by calling the CRA number. The statement is sent to the registered email id.