NPS or National Pension Scheme is a government-sponsored pension scheme that was launched in 2003. It is a voluntary pension scheme and was initially designed for the government employees only. But from 2009, NPS was made accessible to every Indian citizen, including the unorganised-sector workers.
Let’s learn about the NPS benefits, features, NPS minimum contribution, NPS tax benefits and more in this post.
NPS: Basic Features
The following are the basic features of the National Pension Scheme:
- NPS Minimum investment amount: Rs 500 for Tier-I and Rs 250 for Tier-II NPS account
- NPS Maximum investment amount: No upper limit
- NPS Maturity period: Till the subscriber attains 60 years of age
- NPS Joining age of subscriber: 18 years or more
- NPS No. of withdrawals before maturity: Maximum 3, with a gap of 5 years between two withdrawals
Who can join NPS?
The following list of persons can open an account under the National Pension Scheme:
a) Central Government Employees (except Armed Forces) and Central Autonomous Bodies joining Government service on or after 1st January 2004.
b) State Government Employees and those joining State Autonomous Bodies after 1st January 2004.
d) Individual aged between 18 – 60 years on the date of application
e) Unorganised sector workers under the Swavalamban Yojana (those aged between 18-60 years on the date of application)
Please note that NPS is open to the Indian citizens and NRIs.
NPS: Tax Benefits
Presently, you can claim your NPS contribution as deduction from gross total income for up to Rs 1.5 lakhs (along with other prescribed investments). This provision is as per section 80C of the Income Tax Act, 1961.
Informative: What is income tax?
For the employer: The employer’s contribution to NPS is exempt from income tax, u/s 80CCD.
Please note: The interest accrued on the contribution and the amount used by the subscriber to buy the annuity is not taxable. Only the amount withdrawn by the subscriber after the age of 60 is taxable.
How to Open an NPS Account Online?
The following are the pre-requisites for online opening an account under the National Pension System:
- Active mobile number
- email ID
- Bank account with active netbanking facility
Steps to open an NPS account online:
1st Step: Log in to eNPS (https://enps.nsld.com/eNPS/) or internet banking of your bank’s portal: Register for NPS under the ‘Service Requests’ tab.
2nd Step: Verify information and confirm with an Aadhaar OTP.
3rd Step: Get your PRAN (Permanent Retirement Account Number) after making your first NPS account deposit.
After submitting the online form, a service request is created, and the NPS account is activated the following working day. Your Permanent Retirement Account Number will be issued through an SMS on the registered mobile number.
Types of NPS Accounts
There are two types of NPS accounts, namely, Tier-I and Tier-II. Both these accounts are linked to your PRAN or Permanent Retirement Account Number. Let’s know about these here:
NPS Tier-I Account
NPS Tier-I account is a mandatory account in which minimum deposit amount is Rs 500 per month. This account cannot be used to withdraw entire money till your retirement. There are again restrictions on withdrawal from this account post-retirement.
NPS Tier-II Account
NPS Tier-II account is voluntary/optional. You can start with Rs 250/month in this account. You can easily withdraw the entire money from your Tier-II account, without restrictions.
When to Withdraw Money from NPS?
You are expected to stay invested in NPS until your retirement, since it’s a pension scheme. As you turn 60, you must use min. 40% of the corpus to buy an annuity income from a PFRDA-listed insurance company.
The remaining 60% can be used like this:
- 40% of the funds can be withdrawn tax-free
- 20% can also be withdraw but this will be taxed as per your income tax slab or you can use it to buy annuity
Also Check: NPS Calculator
Some of the NPS scheme benefits are as follows:
- Flexible Investment Amount
You can start investing in Tier-I account with a minimum investment of Rs 500/month and Rs 250/month for Tier-II account. This makes it affordable and convenient.
- High Returns
As NPS invests in different investment options, investors can earn inflation-beating returns both in the short and long run. While investment in government securities and EPF may not earn high returns, investment in equity can earn investors high returns in a shorter period of time. It’s one of the best NPS scheme benefits that makes it a preferable savings option.
Also Read: NPS vs PPF
- NPS Tax Benefits
NPS subscribers can take advantage of the numerous tax benefits in place. Under Section 80 CCD (1) of the ITC Act, an employee’s contribution to NPS Tier- I account is subject to a tax deduction to the limit of INR 1.50 lakh. In addition to it, the employer’s contribution towards Tier I account is subject to a tax deduction as well.
What is NPS: FAQs
Yes, NPS is a good investment option if your goal is to earn high returns and have investment safety. Unlike other pension schemes, NPS invests in marked-linked instruments, thus making it a high-yielding investment scheme.
NPS is a voluntary pension scheme backed by government. It is open for Indian citizens and NRIs (employed in organised & unorganised sector, self-employed).
A/c holder has to contribute to NPS every month (min. Rs 500) and this amount is then invested in market-linked instruments. This is how the returns are generated.
You can only withdraw 20% of the accumulated corpus in NPS before you are 60 years old. You must use 80 per cent of the corpus to buy an annuity.
If the accountholder dies before 60, the entire NPS corpus in that account would be transferred to the nominee/legal heir mentioned in the account details and the account will be closed.
It is only for tier-1 accounts. For tier-II accounts, you can make online NPS contribution via netbanking, debit card or UPI.
After retirement, one can only withdraw 60% of the money, with the remaining 40% invested in annuity for regular pension. One cannot remove the whole fund from NPS after retirement.