What is NPS (National Pension System) | NPS Scheme

What is NPS (National Pension System) | NPS Scheme

The National Pension System (NPS) is a contribution scheme launched by Indian Government. NPS Scheme is a defined contribution retirement savings scheme in which the contributions are invested in a mix of assets and the retirement corpus is subject to returns from those assets. The returns in National Pension Scheme are market-connected.

The professional pension fund managers are entrusted with the task of managing the investor's money. NPS Scheme is an attempt to ensure that the country’s citizen would earn a stable income after their retirement along with helping them earn good returns on their investment. 

In this post, I will try to clarify few things about the National Pension System that you need to know.

National Pension System | NPS Scheme

The National Pension Scheme was launched on 1 January 2004 for newly employed central government employees. But from the 1 May 2009, the National Pension System was made open to all citizens of the country between the age of 18 and 60, including self-employed professionals and others who work in the unorganized sector on a voluntary basis.

Eligibility Criteria for NPS Scheme

All Indian citizens between the age of 18 years and 65 years can join NPS scheme. The only condition is that the subscriber should adhere to the KYC (Know Your Customer) norms. NRI can also join National Pension System. However, the account will be closed if there is a change in the citizenship of the NRI.

Documents required for opening an NPS Account

Any Individual who wants to get registered as a subscriber and wants to open an NPS account should submit the duly filled subscriber registration form with other supporting KYC documents (proof of identity, address, and date of birth) to the POP.

Minimum Contribution in NPS Scheme

Start contributing in Tier I account with at least Rs. 500. The minimum contribution in Tier I account is Rs. 1000 for a financial year. Over and above this limit, you can contribute any amount at any frequency. For opening Tier II account, you have to pay an initial contribution of only Rs. 1000. Tier II account gives you the flexibility to invest any time through any POP.

Types of Accounts under NPS Scheme

Under National Pension System, an investor can open two accounts: Tier I and Tier II accounts.

Tier I Account

The primary account, which is a non-withdrawable permanent retirement account. You can not withdraw entire money from this account till your retirement. Even, there are restrictions on withdrawal on retirement. Partial withdrawals are allowed on certain conditions. All the tax benefits that NPS scheme offers are applicable only to Tier I account.

Tier II Account

It is a voluntary savings account from which investors are free to withdraw their savings whenever he/she wishes. Tier II account is an investment account, similar to a mutual fund in characteristics. An active Tier I account is a pre-requisite for opening a Tier II account.

Benefits of National Pension System | NPS Scheme

Following are the benefits of National Pension System (NPS)

1. It is voluntary:  NPS scheme is open to every Indian citizen and is entirely voluntary. A subscriber can choose the amount he/she wants to contribute and save every year.

2. It is simple: The application process is very simple and convenient. The subscriber has to do is to open an account with any of the POPs (Point Of Presence) and get a PRAN.

3. It is flexible: It allows subscribers to choose their own investment option and pension fund and see their money grow.

4. It is portable: The subscribers can operate their NPS account from anywhere in India, even they change the city, job or their fund manager.

5. It is regulated: PFRDA regulates the NPS, with transparent investment norms and regular monitoring and performances review of fund managers by NPS Trust.

Tax Benefits under National Pension System | NPS Scheme

Following are the tax benefits under National Pension System (NPS)

1. Tax Benefit for Individual: Any individual who contributes in NPS scheme can claim a tax deduction up to 10% of the salary (Basic+DA) under Section 80CCD(1) within the overall limit of Rs. 1.5 lakh under Section 80CCE. For self-employed individuals, this limit is 20%  of gross income.

2. Tax Benefit for Corporate Subscriber: Additional tax benefit is also available to subscribers under corporate sector under Section 80CCD(2) of Income Tax Act. The employer’s contribution (towards the employee’s NPS) up to 10% of salary (Basic + Dearness Allowance) without any monetary limit is deductible from the taxable income.

3. Exclusive Tax Benefit under Section 80CCD(1B): The subscriber is allowed an additional deduction of Rs.50,000 from gross taxable income for investing in NPS under Section 80CCD(1B). This deduction is over and above the maximum tax deduction of Rs. 1.5 lakh under Section 80C of Income Tax Act 1961.

Note: Tax benefits are applicable for investment in Tier I account only.

Withdrawals under National Pension System | NPS Scheme

As per PFRDA (Pension Fund Regulatory & Development Authority) exit rules, following withdrawal categories are allowed:

1. Upon Normal Superannuation

At least 40% of the corpus of the subscriber has to be utilized to buy an annuity income from PFRDA listed insurance company and the balance is paid as lump sum to the subscriber. In case the total corpus is less than Rs. 2 lakhs as on the date of retirement (Govt sector)/attaining the age of 60 (Non-Govt sector), the subscriber can avail the option of complete withdrawal.

2. Upon Death

The entire corpus (100%) would be paid to the nominee/legal heir of the subscriber and there would not be any purchase of annuity/monthly pension.

3. Exit from NPS scheme before the age of Normal Superannuation

At least 80% of the corpus of the subscriber should be utilized for the purchase of an annuity providing the monthly pension of the subscriber and the balance is paid as a lump sum to the subscriber.

Note: You can continue to contribute in your NPS account beyond the age of 60 years but up to the age of 70 years.

Partial withdrawal under National Pension System | NPS Scheme

Now you can withdraw up to 25% of the contributions made by you and standing to your credit subject to conditions. To be eligible for partial withdrawal, you must be in NPS scheme for a minimum period of 3 years. You can make a partial withdrawal for the following purposes;

1. For higher education of your children or for self.

2. For the marriage of your children.

3. For treatment of serious specified diseases for self and family members.

4. For setting up or acquiring a new business

5. For the purchase or construction of a residential house/flat if you are not having a residential house/flat.

You are allowed to make a maximum of three partial withdrawals during the entire tenure of subscription to NPS scheme. Your partial withdrawals are tax-exempt.

You can also read: PPF (Public Provident Fund) - A popular saving scheme

You can also read: What is Atal Pension Yojana (APY)?

You can also read: How to invest in mutual funds online?

You can also read: ELSS (Equity Linked Saving Scheme)

If you liked this article, share it with your friends and colleagues through Twitter or Facebook. Your opinion matters, please share your comments.

What is NPS (National Pension System) | NPS Scheme