National Pension Scheme

Last Updated 16th Jul 2020

National Pension Scheme Details

  • NPS is a voluntary pension system of regular income after retirement.
  • Any private or public sector employee can invest in NPS scheme.
  • National Pension scheme has two options, Tier-1 and Tier-2.
  • You can open NPS accounts by visiting POP-SP or through eNPS.
  • There are tax benefits of upto Rs. 2 Lakhs on NPS.
  • Partial withdrawal on NPS is allowed after 3 years for specific purposes.

What is NPS?

NPS or National Pension Scheme is a government scheme to mobilise your earnings for a regular income as a pension after retirement. The central government launched the scheme under Pension Fund Regulatory And Development Authority on 1st June 2009.

Who can invest in the National Pension Scheme?

NPS is open to all the employees of private and public sectors, including the unorganised sector. However, the armed forces are exempted from investing in the National Pension Scheme. The employees should either be residents or non-residents of India and should fall in the age bracket of 18-65 years.

Features and Benefits of NPS

National Pension Scheme is a voluntary scheme wherein you can invest at any point of time in a financial year
These are some of the features and benefits of NPS:

  • Return on investments: National Pension scheme returns are higher as compared to other investment schemes like PPF or FD. You can earn returns of 8%-10% on the investments depending upon the market-related risks.
  • Regulations: National Pension System is regulated by Pension Fund Regulatory and Development Authority(PFRDA). There is transparent monitoring and reviewing of fund managers under NPS trust.
  • Flexible: NPS is a flexible scheme as investors can choose their investment plans and fund managers. The subscribers can also change their investment schemes or fund managers if they are not satisfied.

Tax Benefits of NPS Scheme

An individual who has invested in the NPS scheme can claim tax deductions up to Rs. 2 Lakhs under specified limits. However, these tax deductions can be claimed under Tier-1 accounts.

  • Under Sec 80 CCD (1), you can claim a tax deduction up to 10% of gross income up to Rs. 1,50,000. The self-employed businesses can claim tax deductions upto 20% of the total income.
  • Under 80CCD (1B), you can get additional tax deductions for investments up to Rs. 50,000 apart from the tax deductions under Sec 80 CCD (1).
  • Under Sec 80CCD (2), there are tax benefits available for corporates as well. They can claim tax deductions up to 10% of salary (Basic + DA) on an Employer's NPS contribution for the benefit of the employee) .

Major National Pension Fund Managers in India

The major pension fund managers of National in India are:

  • Aditya Birla Sun Life Pension Management Limited.
  • HDFC Pension Management Company Limited.
  • UTI Retirement Solutions Limited.
  • SBI Pension Funds Private Limited.
  • ICICI Prudential Pension Funds Management Company Limited.
  • Reliance Pension Fund.
  • Kotak Mahindra Pension Fund Limited.
  • LIC Pension Fund.

Here are some of the top-performing fund managers:

Pension Fund Managers Investment Tier NPS Returns
1 Year returns (%)
NPS Returns
3 Year Returns (%)
NPS Returns
5 Year Returns (%)
SBI Pension Fund Tier-1 13.19 9.01 9.99
HDFC Pension Fund Tier-1 19.15 10.07 11.17
Reliance Capital Pension Fund Tier-2 13.26 9.34 10.87
LIC Pension Fund Tier-2 24.11 12.37 12.34

Process to Open an NPS Account

You can open an NPS account either by visiting POP-SP or through eNPS. In India, NPS accounts are regulated by the Pension Fund Regulatory and Development Authority.

Offline Process

  • To open an NPS account through offline mode, you need to visit the Point of Presence- Service providers and procure a Permanent Retirement Account Number application form.
  • Fill in the necessary details like your mandatory details, scheme preference along with your signature and photograph.
  • Submit the application form and the required KYC documents like identity proof and proof of address.
  • POP-SP will provide you with a receipt number when you submit the form and documents.
  • At the time of registration, you also need to make a minimum contribution of Rs. 500 as your first contribution.
  • You can track the status of your PRAN application using this receipt number given by POP-SP, who will send you a Permanent Retirement Account number.

Online Process

You can also open an NPS account online by visiting eNPS website through PAN & Bank details. The process to open the account through online mode is easy and can be completed in less than half an hour. However, to open an account, your Aadhar card must be linked with the PAN card.

  • Visit the necessary details on eNPS website using your PAN number.
  • An OTP will be sent to your registered mobile number on submitting the online application form, and this will generate your Permanent Retirement Account Number.
  • You can log in for NPS contributions using PRA number.

Types Of NPS Account

The two types of NPS Accounts are Tier-1 and Tier-2 accounts. Here is the difference between the two accounts:

Category NPS Tier-1 Account NPS Tier-2 Account
Meaning It is a default and mandatory retirement account. It is voluntary saving account
Minimum Contribution Rs. 500 or Rs. 1000 p.a Rs. 250
Tax deductions Upto Rs. 2 Lakhs No deductions
Withdrawal After retirement Can withdraw anytime

Calculation of NPS Pension

NPS pension calculator is an online tool which gives tentative information about the NPS Pension and Lump Sum amount based on the following factors:

  • Regular monthly investments
  • Annuity
  • Rates of NPS returns
  • Amount reinvested for purchasing an annuity

You can calculate the National pension scheme returns using the online NPS pension calculator of National Pension System Trust by filling details such as date of Birth, Monthly investment, Total years of investments and Purchase of annuity.

Consider this illustration to understand the calculation of NPS pension.

If you have decided to invest Rs. 1000 per month in your NPS account for a total of 42 years. The expected NPS return is 10%, and you choose to purchase the 40% annuity at the rate of 6% your pension corpus at the time of retirement would be as follows:

Monthly Pension- Rs. 15,618
The lump-sum amount for withdrawal- Rs. 46,85,300
Annuity Value- Rs. 31,23,533

NPS Withdrawal Rules

According to the PFRDA (Exits & Withdrawals under NPS) Regulations 2015, the NPS withdrawal can be made under the following circumstances:

  • NPS withdrawal on Superannuation: On superannuation (Retirement age of 60), 60% of the total amount invested can be withdrawn as a lump- sum amount. The remaining 40% is used to purchase an annuity which serves as a source of regular monthly pension after the retirement.
  • NPS withdrawal before maturity: The premature withdrawal of funds can be made after a lock-in period of 10 years. Investors can withdraw 20% of the total investment as a lump-sum amount, and the remaining 80% is used to purchase the annuity.
  • NPS withdrawal on death: If a person dies, the entire investment amount is paid as a lump-sum amount to the legal heirs of the investors.

FAQs

Is NPS a good investment?

Yes, the national pension scheme is an excellent voluntary investment scheme for retirement savings. NPS benefits may include monthly pension after retirement and tax benefits as well.

Who can open an NPS account?

Any Indian and Non-Indian Resident who is an employee of a private or a public organisation can open an NPS account.

Is NPS better than PPF?

Yes, you can get better NPS returns than PPF; however, PPF is more tax-efficient on maturity.

What happens to NPS if I die?

If a person dies, the entire investment amount is paid as a lump-sum amount to the legal heirs of the investors.

What is the locking period of NPS?

The lock-in period of the NPS scheme is a minimum of 10 years. However, you can partially withdraw funds after the lock-in period.

Is NPS risk-free?

No, NPS returns are subject to the risks of the market.

What is the NPS interest rate?

You can earn NPS returns upto 8%-10% interest rate.

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