What is the National Pension Scheme (NPS)?

NPS is a voluntary retirement scheme and is also one of the cheapest long-term investment plans for retirement.

What is National Pension Scheme (NPS)?

NPS is a pension scheme sponsored by the central government as a social security initiative. This pension scheme was launched in January 2004 for government employees only but later on, in 2009 it was extended to all the citizens of India including the unorganized sector.

NPS is a voluntary retirement scheme and is also one of the cheapest long-term investment plans for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA). This scheme encourages people to invest and save systematically in a pension account at regular intervals during employment.

Under this scheme, an individual has to contribute a particular amount regularly in a pension account during their working life, and at the time of retirement they can withdraw a certain percentage of the amount invested in the pension account, and the remaining amount after withdrawing will be received as a monthly pension post your retirement.

Who should invest in NPS?

NPS is an excellent scheme for those who want to plan their retirement early and safely and, as it is a voluntary retirement scheme, investment in this scheme is highly beneficial for private-sector employees who require a regular pension after retirement. Also, salaried individuals who want to take benefits of Section 80 CCD(1B) deductions can consider this scheme.

Any Indian citizen from the age of 18-60 can invest in the NPS. OCIs (Overseas Citizens of India) and PIOs (Persons of Indian Origin) are not permitted to invest in NPS. The current rates of return on this scheme has so far returned an annualized amount of 9%-12%.

Why should you invest in NPS?

As discussed above, NPS is considered a highly beneficial scheme for all the citizens so here are some of the major key points which will let you know that why one should invest in NPS:

1. If you are investing in NPS then a deduction can be claimed for the contribution of the employee and employer as well. The deduction can be claimed up to a limit of Rs. 1.5 lakh and an additional amount of Rs. 50,000 under Section 80 CCD(1B) of the Income Tax Act.
2. Your investment in NPS assures your monthly post-retirement pension.
3. NPS is the cheapest investment option along with multiple benefits and comparatively low risk as compared to other vehicles.
4. While you are required to invest continuously until the age of 60, this scheme also offers you the option of early withdrawal up to 25% for specific purposes including weddings, higher studies of children, building or buying a home, etc.
5. Being one of the best investments in India, NPS invests in equity. Upto 50% of your savings can be allocated to equities. There are two options to invest in, which are: auto-selection or active choice. The auto-selection will determine your risk profile for this investment option in India according to your age. The older you are, for instance, the more stable and the less volatile your investments are, with more inclination toward debt and lesser toward equities. On the other hand, the active option gives you the freedom to decide the scheme and split your investments.

Types of NPS Account

Tier I Account:

A Tier I account is a non-withdrawal permanent retirement account with a particular lock-in period until the account holder reaches the age of 60 years. However, changes have been introduced by the regulatory bodies in 2011 in which account holders are allowed for premature withdrawals after the completion of 15 years in the service.

Tier II Account:

This type of account is just like a savings account; it allows you to have unlimited withdrawals. However, no Tax benefits are offered in Tier-II accounts. It is mandatory to open a Tier-I account first to open a Tier-II account.

The minimum contribution in an NPS Tier-I account is Rs. 500 monthly and Rs.6000 for a year. Whereas on the other hand in a Tier-II account, the minimum contribution is Rs.1000 and there will be a charge of Rs.250 for subsequent transactions.

Ways to open an NPS Account

Online process

1) You need to have a bank account in any of the banks that are registered at the National Securities Depository Ltd (NSDL). There are 17 banks that are registered at NSDL.
2) If your PAN details are linked to your savings account, you can log on to the official website of E-NPS and submit your online account application.
3) Bank will take care of the full procedure of KYC and the processing of your application.

An E-NPS account can also be opened with the help of an Aadhaar card but it is required to be linked to your mobile and savings account number. On logging into the E-NPS portal, you would share your mobile number linked to the Aadhaar card. Then, you will receive an OTP on the registered cellphone number for verification. However, don’t forget to activate your online banking facility before applying for an eNPS account.

Offline process

You can open an NPS account offline as well.

Firstly you need to find a point of presence near you. Several banks act as intermediaries that help you to open an eNPS account offline. Then, you will be given a registration form to fill. Select the relevant option, fill out all the relevant details and submit it along with all your KYC documents. You will be charged RS.125 as PoP charges for account opening.

Maturity of the NPS account

With NPS being a pension product, you will be expected to stay invested till the age of 60 at least. At 60, you will be required to use at least 40% of your corpus for buying an annuity income from a  Pension Fund Regulatory and Development Authority (PRFDA)-listed insurance company. You have the option of withdrawing the remaining 60% tax-free, or you can defer withdrawing the lumpsum amount till you are 70 years old.

FAQs about NPS

1. How to avail NPS tax benefits?
If you are investing in NPS then a deduction can be claimed for the contribution of the employee and employer as well. The deduction can be claimed up to a limit of Rs. 1.5 lakh and an additional amount of Rs. 50,000 under Section 80 CCD(1B) of the Income Tax Act.

2. Can I have two NPS accounts?
You cannot have two NPS accounts. It is not necessary to have two accounts either.

3. What happens if someone dies before their account reaches NPS account maturity?
In the scenario of someone’s death, the entire accumulated corpus will be transferred to any beneficiaries or heirs declared at the time of opening the NPS account.

4. What happens if I don’t invest my yearly amount?
Your account will be frozen if you don’t invest your yearly amount. You can always pay a certain amount of fine, unfreeze your account, and restart though.

5. Can I withdraw before my account reaches maturity?
Yes. If you have remained invested for at least three years, you can withdraw upto 25% of your corpus for certain purposes like weddings, higher education of children, etc. This withdrawal can be made three times with a gap of five years between withdrawals. However, it is recommended to not withdraw any amount until maturity as much as possible.

6. Is the tax waived off for the lump sum withdrawal after maturity?
Yes, the tax is waived off if you withdraw after the maturity.

7. Can I change fund managers if I’m not satisfied with the returns?
Yes, you are allowed to change the fund managers.