The National Pension System (NPS) is an Indian federal government-sponsored pension and investment scheme designed to protect and provide for Indian citizens as they age. It is a pure retirement pension plan. If you invest in national pension scheme, you can receive a stable income with tax benefits after retirement, and with a bit of optional risk, you can significantly increase the returns. The NPS is a low-cost pension product that is professionally managed by pension funds. The pension funds are regulated by the Pension Fund Regulatory and Development Authority of India, a central government agency.
When you invest in national pension scheme, there are various national pension scheme investment options which include both auto and active investment options and four asset classes. These four asset classes are alternative investment funds, corporate debt, equity, and government bonds. In the following sections, let’s learn more about NPS and which is the best NPS to invest in suited to your interests.
- How National Pension Scheme Works
- Who Should Invest in NPS from government and non government sectors?
- Online NPS Registration
The Features and Benefits of the National Pension Scheme
NPS tax advantages: This is one of the most appealing advantages if you invest in national pension scheme in terms of tax savings. Subscribers can get tax exemptions for NPS contributions up to 1.5 lakhs under Section 80C of the Income Tax Act.
After-retirement withdrawal rules: Individuals can withdraw up to 60% of their total contribution after retirement, which is also tax-free. The remaining 40% is paid to the individual through a regular annuity from a PFRDA-registered insurance firm.
Returns/interest: A part of the total scheme contribution amount is invested in equities in order to generate higher returns compared to the traditional tax-saving instruments such as PPF. It typically pays 9 per cent to 12 per cent interest, making it an excellent long-term secure investment for those with a low-risk tolerance.
Premature withdrawals and exit rules: According to government regulations, it is mandatory to contribute to the NPS until retirement or the age of 60, whichever comes first. After three years from the date of account opening, subscribers can make partial withdrawals of up to 25% of the corpus. Only Tier I account holders can withdraw funds prematurely. They can withdraw a maximum of three times in five years.
Equity allocation rules: One of several other benefits when you invest in national pension scheme, is that it allows individuals to choose how their contributions are allocated. Subscribers can select between active choice and auto choice of NPS investment options. The former will enable investors to choose funds and divide their investments according to their suitability, whereas the latter considers an individual’s age and risk profile before investing. However, according to the equity allocation rule, investors can allocate up to 50% of their corpus to equity.
Risk evaluation: After the investor reaches the age of 50, the equity cap will be reduced by 2.5 per cent every year. This is done to protect the corpus from market volatility.
Voluntary: It allows subscribers to contribute any amount they want at any time of year and to change their contribution amount every year.
Regulated: Because it is subject to PFRDA regulations, there is regular monitoring, as well as transparency in norms, and it provides reliability to its subscribers.
Flexibility: Individuals can choose their investment mode and fund based on their needs.
Simplicity: Subscribing to NPS is as easy as visiting the NPS website or any point of presence (POP).
Did you Know?
NPS scheme investment is a low-cost, flexible, and portable retirement savings plan in which the wealth accumulated is determined by the individual’s contributions. Therefore, the returns after retirement depend entirely on how much you invest in national pension scheme.
Who Should Invest in NPS?
The NPS’s central recordkeeping agency provides two broad classifications for Indian residents between the ages of 18 and 65 on the date of application.
- Central Administration
The Central Government implemented the NPS on January 1, 2004, except for the armed forces. All employees of Central Autonomous Bodies (CAB) who joined on or after the date of NPS implementation are required to participate in the NPS’s government sector. Employees of the Central Government or the CAB contribute to their pension from their monthly salary, with their employer matching their contribution.
- State Administration
Following the Central Government, various State Governments adopted this architecture and implemented the NPS on various dates. A State Autonomous Body (SAB) can also adopt NPS if the concerned State Government or Union Territory has adopted and begun implementing the NPS architecture. Employees of the state government, or SAB, also contribute to their pension from their monthly salary, with their employer matching their contribution.
Non-government or private sector
The NPS corporate sector model is a customized version of the NPS designed to accommodate various organizations and their employees in adopting NPS as an organized entity within the context of their employer-employee relationship.
- Every Indian citizen
From May 1, 2009, any individual who is not covered by any of the above sectors was allowed to join the NPS architecture through the All Citizens of India Sector.
How to Set up an NPS Account?
Individuals can open an NPS account by visiting branches of government and private sector-approved financial institutions in person or by following the procedure online. The following authorized financial institutions can act as pension fund managers for your NPS account.
- Aditya Birla Sun Life Pension Management
- HDFC Pension Management
- Reliance Capital Pension Fund
- Kotak Mahindra Bank
- State Bank of India
- Life Insurance Corporation of India
- UTI Mutual Fund
These institutions’ branches are referred to as points of presence (POP).
Visit NPS in Person
A subscriber must present Know Your Customer (KYC) documents such as:
- Voter Identity Card
- Driving Licence
- Aadhaar letter or card
- NREGA card
- PAN card
The account registration form must be completed at the POP. Following the submission of the registration form, a unique number known as the Permanent Retirement Account Number (PRAN) will be assigned.
This number is permanent and portable, which means it will remain the same throughout your life even if you change your workplace, the financial institution that assisted you in opening the NPS account, or your address. Your account is now operational.
Online NPS Registration
One can open an account and register online through the eNPS website. The following items are required to open an NPS account online:
- Aadhar Number (You must have your Aadhar Number linked to your mobile phone in order to open an account online. If it is not linked, you must physically visit the POP)
- Image of your signature scanned
- Details about your bank account that has net banking enabled.
Fill out the registration form and upload an image of your signature. When you submit the registration form, an OTP will be generated and sent to your mobile phone. You can use this OTP to complete the verification process, and a PRAN will be assigned to your account. The minimum deposit is INR 500, and your first financial entry is processed through online payment gateways on the eNPS website. Following the completion of this process, a card for your NPS will be mailed to the address you provided in the form, which corresponds to your KYC.
Word to Remember
If you invest in national pension scheme, you cannot withdraw the entire corpus after retirement. You can withdraw up to 60% of your corpus, but you must keep the remaining 40% in order to continue receiving your pension on a regular basis.
It’s difficult to know exactly how much you’ll need to sail through your retirement years ahead of time, which makes retirement planning difficult. This corpus can be estimated using either an income replacement or an expensive replacement technique. Ideally, you take the number of years you expect to live in retirement and multiply it by your annual expenses or annual income just before retirement. However, things are not as simple because you must also account for inflation, unanticipated expenses resulting from emergencies, or a health condition that costs more than your insurance. What you can do is invest in national pension scheme as your primary retirement savings vehicle and supplement your total savings with other available instruments to build a retirement corpus that meets your financial needs.
The main reason for this change is to ensure that retired government employees continue to receive a regular and stable monthly income.
The Pension Accounting Office, which is the official body in charge of this task, calculates the interest.
The minimum monthly contribution for Tier I accounts is Rs.500, and the minimum monthly contribution for Tier II accounts is Rs.250. Subscribers should maintain a minimum balance of Rs.6000 for Tier I and Rs.2000 for Tier II at the end of the year.
No. According to the CCS’s NPS guidelines, leave encashment is not permitted and does not count as a component of the benefits available to the employee after retirement.
Read more about Retirement Age in India.