National Pension Scheme

Whether you’re working in the government sector or private, securing your post retirement future is important. The government of India launched the National Pension Scheme (NPS) to benefit the citizens of the country. When launched in 2004, NPS was open to only government employees. But, in 2009, it was opened to all Indian citizens. The scheme was made to encourage more individuals to plan and invest in their pension while still employed.

What are the key NPS Scheme details?

  • Anyone subscribing to the National Pension Scheme can make regular contributions to a pension account during their employment tenure
  • Once one joins the National Pension Scheme India, they are given a Unique Permanent Retirement Account Number (PRAN)
  • Each subscriber is allocated two accounts which are accessible at any time – NPS Tier 1 and NPS Tier 2

What are the differences between NPS Tier 1 and NPS Tier 2 accounts?

  • NPS Tier 1 Account – No withdrawals are allowed from this account. The account is meant for savings post retirement.
  • NPS Tier 2 Account – This is similar to a regular savings account at any bank. The subscriber can make as many withdrawals as they choose to.

1.  NPS Benefits & Features

Let us take a look at all the National Pension Scheme benefits and its salient features:

  • Every subscriber to the National Pension Scheme is allocated a unique Pension Retirement Account Number (PRAN)
  • Easy Returns/Interest – A part of the NPS is invested in equities and have shown to deliver annualized returns between 8 and 10 %. Thus, being higher than any other tax-saving instrument (like PPF)
  • Minimum contribution amount has to be INR 6000 per year or INR 500 every month. Failure to make a payment will lead to a pension account freeze.
  • Minimal Risk – The 50% cap on equity exposure for the national pension scheme ensures the risk is minimized in the interest of all NPS account holders.
  • Post retirement (Minimum 60 years of age) you cannot withdraw the entire amount. 40% of total corpus amount must be kept in your account to receive a monthly pension
  • Tax on withdrawal – When you withdraw 60% of your total corpus post retirement, 40% is tax free and you will only have to pay tax on the remaining 20%
  • If you’ve been investing for at least 10 years, you may make a withdrawal of up to 25% for definitive purposes (children’s wedding, higher studies, buying/building a house, medical emergency for self or family)
  • Choose how much of your NPS amount is invested in equities (Max of 50%) You can set your choice by communicating it with your Equity Fund manager or on the online NPS account portal
  • Easily change the Pension Scheme or Equity Fund manager

Tax Benefit under NPS – The NPS 80 CCD?

As per section 80CCD you can claim a deduction from your income on contributions to your NPS account. In simple terms, if you were to contribute 10,000 INR per year to your pension account, you will be only taxed on your Income Amount – 10,000 INR.

NOTE: The maximum deduction that can be claimed per section 80 CCD is INR 1,50,000

2.  NPS Eligibility & Required Documents

  • All Indian Citizens between the ages of 18-60 having a stable source of income are eligible to subscribe to the National Pension Scheme.
  • Subscribe to NPS – All one needs to do to become a subscriber to the NPS Scheme is to submit a duly filled and signed registration form at your nearest Point of Presence (POP) or branches of the POP
  • You can also open an account online on the NSDL NPS online portal. All you will need is your account to be linked to your PAN and you’re set.

The Documents that need to be submitted to register for NPS are:

  • Address Proof (Passport, Ration Card with photograph, Aadhar Card and Photo identity Card, Bank Passbook, PAN Card etc)
  • Identity Proof (PAN Card, Aadhar Card, Electricity Bill, Water Bill, Photo identity Card, Passport, Ration Card with photograph, Job Card issued by NREGA, Electricity Bill, Water Bill and Bank Passbook etc.)

3.  What is the New Pension Scheme?

Initially introduced by the Government of India for all individuals employed in the government as well as private sector, The New Pension Scheme has been made open to all Indian citizens as of May 2009.

What are the New Pension Scheme details?

This Scheme is structured into three types of accounts:

  1. Tier 1 Account – A subscriber cannot withdraw any funds before retirement. Compulsory for all government employees to invest 10% of their salary into this account
  2. Tier 2 Account – A subscriber is free to invest and withdraw funds as per their convenience. But, it is necessary for the subscriber to have a Tier 1 Account in order to open a Tier 2 Account
  3. Swavalamban Account – The Indian Government contributes INR 1000 per annum for the initial 4 years. The account is in place to encourage workers of poorer economic standing.

What are the benefits of the New Pension Scheme?

The New Pension Scheme primarily benefits all government employees and workers of poorer economic standing. The government is able to save on dishing out pensions to millions of citizens from its pockets and also secures the future of a majority of its citizens.

4.  New Pension Scheme V/S National Pension Scheme

Here, we take a look at the major differences between the two schemes.

NATIONAL PENSION SCHEME NEW PENSION SCHEME
Dearness allowance not included when calculating the nps employee contribution Dearness allowance is taken into consideration
The banks contribution (same as employee contribution) is kept in a separate account Bank + Employee contribution are kept in the same account
One month notice required to stop monthly contributions Contributions and withdrawals can be made anytime
Managed by a P.F Trust Six fund managers appointed by PFRDA are in charge of account management
No central regulatory body PFRDA is the authorized regulatory body
Zero NPS charges or fees Fixed as well as variable charges are applicable

5.  Types of NPS Scheme’s

As per the New Pension Scheme it is necessary to have a Tier 1 account and only by having this can you open a Tier 2 account. But, what are the key features of these accounts?

NPS Tier 1 account

  • This account is created by default upon subscribing to the NPS
  • No withdrawals are permitted
  • Tax exemption of up to INR 2,00,000 can be claimed on this account
  • INR 6,000/annum is the minimum contribution value
  • No limits on maximum contribution

NPS Tier 2 account

  • This account is created by a subscriber who has a Tier I account
  • Unlimited withdrawals
  • No Tax exemptions
  • INR 2,000/annum is the minimum contribution value
  • No limits on maximum contribution
  1. Svavalambam Pension Yojana account – NPS Lite
  • Meant for economically backward sections of society
  • Subscribers are to be between the ages of 18-60
  • The Indian Government makes a contribution of INR 1000/annum for the first for years.

NOTE: Currently, the Svavalambam pension scheme has been replaced by the Atal Pension Yojana. Under this, any subscriber under the age of 40 is eligible to receive a pension  amount of upto INR 5,000 once he/she is 60 years of age.

6.  Where to open a NPS Account?

NPS Registration can be done in a number of ways. To simplify this process, we’ve broken it down into two sections.

  1. Open NPS account offline

Find the nearest Point of Presence (PoP), could be an authorized bank. Collect, fill and submit the NPS form from the PoP along with necessary KYC documents. Once the initial investment is made (not less than INR 500 monthly or INR 6000 annually), you will receive a PRAN – Permanent Retirement Account Number. The Number and password are given to you in a welcome kit and cab be used to operate your account.

NOTE: There is a one-time INR 125 registration fee for the entire process

  1. Open NPS account online

The National Pension Scheme online website lets you easily subscribe to the NPS in as less as half an hour!

  • Visit the NSDL NPS website (enps.nsdl.com)
  • Fill out all necessary details as well as upload necessary KYC Documents
  • Validate your registration using the OTP sent to your mobile
  • NPS Account details including PRAN can be viewed on the portal

7.  NPS Login and Balance Check

All subscribers can check their NPS account balance and NPS statement for their Tier I and Tier II accounts by following these instructions:

  • Visit https://cra-nsdl.com/CRA/
  • Login as subscriber using your PRAN as the username and the password given to you in your welcome kit (unless changed later)
  • Once you have logged in, click on the ‘Views’ option
  • This will open up the details of where the funds have been invested and the account managers in charge of them
  • Subscriber can also check how much amount has been invested and if any returns have been accrued
  • Access Tier 2 balance details by clicking on the ‘Account Details’ section

8.  Why is NPS investment a good option?

When you’re still in the early stages of deciding on a suitable retirement investment plan, the choice can be quite tricky. The most important thing for anyone when making this choice is going for an option that gives them stable returns at minimal risk. And, when it comes to this, there is nothing better than the NPS investment option.

To reaffirm your choice, you can check how much money you’ll have to invest and for how long, to secure your post retirement future. The NPS Investment Calculator lets you know how much monthly retirement amount you’re entitled to receive when you make a NPS Investment.

The calculator effectively calculates the monthly pension amount on the basis of your monthly or yearly contributions and duration of the same.

9.  NPS Interest Rates

As per the guideline of the NPS pension scheme, an individual’s monthly/yearly contributions are pooled into a pension fund. PFRDA-regulated fund managers invest this money into a wide array of equities such as government bonds, bills, corporate debentures and shares. The investments are tightly regulated by set guidelines.

So, the more an individual contributes the better is his NPS fund performance. In addition, if you aren’t happy with your NPS returns you can move to another investment option or choose a different fund manager. Therefore, the NPS rate of interest aren’t fixed but completely market-related.

10. NPS Contribution – How does it work?

The New Pension System as initiated by the Government of India allows all citizens to subscribe to a pension account. There is a minimum amount that has to be invested into the account but there are no upper limits. As these funds are then directed into equity investments, it is difficult to give an exact figure on the rate of returns. Estimates show it to be around 12-14%. However, it is guaranteed to be higher than any other pension scheme out there.

In addition to making the New Pension Scheme open to all, the government issued a special order for all central and state government employees. As per this, all individuals (employed after 01/01/2004) under this bracket will possess a new pension scheme account instead of a general provident fund (GPF). In addition, the NPS employee contribution will come out of his/her salary towards the NPS account and from the employer.

For all non-government individuals, you can make a monthly or yearly contribution by visiting your nearest POP (Point of Presence) or using the NPS online contribution service.

11. Know you pension amount – The NPS Calculator

Everyone wants to be better informed before they invest their money. The investment option has to be safe, secure and provide steady returns. To help figure out the approximate monthly pension amount, a tool, the NPS Calculator was created. The NPS Calculator online can be accessed by visiting the NPS trust website (http://www.npstrust.org.in/content/pension-calculator)

  1. Using the NPS Calculator – How to calculate pension?
  • Visit the NPS trust website and click on the NPS calculator tab
  • Fill in all your details i.e DOB, monthly NPS Contribution, number of years you wish to contribute, expectation on return of investment, and other details
  • View the pie chart and bar graph to the right that details the monthly NPS payment, lump sum value and other details
  1. How accurate is the NPS calculator?

The NPS Calculator gives the nearest approximation to the New Pension Scheme returns. As you’ve read before, there is no set rate of interest on your contributions. It is dependent on the market, and which equity you’re invested in. The calculator also doesn’t account changes in tax laws or any alteration in the New Pension Scheme.

12 NPS Withdrawal – How It Works

The Pension Fund Regulatory & Development Authority (PFRDA) dictates that withdrawal can only be made if any of the following criteria are met:

  1. Normal Superannuation – If a minimum of 40% of the subscribers accumulated pension wealth is utilized in the purchase of annuity. Then, the remaining 60% is paid as lump sum to the subscriber.

NOTE: If accumulated pension amount is lesser than INR 2 Lakhs on the date of retirement/on 60th birthday, the subscriber can withdraw the entire amount.

  1. Death of the Subscriber – 100% of accumulated pension wealth is paid to the nominee/legal heir of the subscriber.
  • Exit before Nomral Superannuation – Maximum of 20% is paid as a lump sum to the subscriber.

a)   What is the NPS Withdrawal Procedure?

  1. Based on the criteria mentioned above, a withdrawal form is to be filled out and submitted to the nearest POP
  2. NPS Withdrawal forms are available on the NSDL-CRA Corporate Website (http://www.npscra.nsdl.co.in). A Subscriber can also send an email to “npsclaimassist@nsdl.co.in” or “info.cra@nsdl.co.in” to get the NPS Withdrawal forms in their e-mail ID.
  • The subscriber is also required to provide the following documentation:
  • Original NPS PRAN card
  • Identity Proof such as Passport, PAN Card, Driver’s License etc
  • Address Proof such as Passport, Voters ID, Aadhar Card etc
  • Bank certificates or cancelled cheques that contain the name of the subscriber as well as his/her bank account number with IFSC code. (For transfer of funds either electronically or through a direct credit)

b)   What are the different types of NPS Withdrawal Forms?

Based on the criteria of your withdrawal request, one of the below listed forms will have to be filled and submitted to the nearest POP.

Type Of Withdrawal
Request Central/State Government Corporate/All Citizens of India Sector Swavalamban (NPS-Lite) Sector
Superannuation 101-GS 301 501
Premature Exit 102-GP 302 502
Death 103-GD 303 503
  1. What are the NPS rules for withdrawal?

There are a number of rules that have to be met in order to proceed with a partial/full withdrawal from NPS.

NPS Tier-2 Withdrawal

  • Unlimited withdrawals can be made from this account. No restrictions
  • Withdrawals made on this account are exempt from Income Tax section 80 CCD

NPS Tier-1 Withdrawal

  • Maximum withdrawal of 20% of total accumulated pension account value
  • Maximum of 3 premature NPS withdrawals/Subscriber
  • Minimum 10 years of contributions to be eligible for premature withdrawal
  • Withdrawals can be allowed in the event of a medical emergency
  • Withdrawals can also be allowed to meet educational/marital expenses of the subscriber’s children.
  • Withdrawals are also allowed on first-time home purchases

13. NPS Death Benefits

In the account of an untimely death of the subscriber, his/her nominee can withdraw the lump sum accrued in the pension account. To proceed with a hassle free withdrawal, the following documents need to be presented along with the relevant withdrawal form.

  • Original PRAN Card
  • A cancelled cheque showing relevant details of the nominee such as his or her bank account number as well as IFSC Code
  • Subscriber’s death certificate
  • A document or certificate that proves the person claiming the amount is the legal nominee or heir of the subscriber
  • Nominee’s ID proof as well as Proof of Address

14. FAQ’s on National Pension Scheme

  1. Following retirement, are employees engaged in government service eligible for leave encasement as per the guidelines of the NPS?

No. Unfortunately, leave encasement is not allowed per the guidelines and does not count towards employee benefits post retirement

  1. What is the reason behind the compulsory utilization of a minimum of 40% of the accumulated pension funds to buy annuities after retirement?

To ensure employees in government service will still obtain a regular and stable income every month following their retirement.

  • Which body is responsible for the calculation of interest with regards to the NPS?

The Pension Accounting Office

  1. Which agency or office will be responsible for contribution deductions In the event of the transfer of an employee during the course of the month?

The office that draws the salary of the pension account subscriber for the maximum amount of time during the month will be responsible for the deduction of contribution towards the NPS

  1. Is NPS Taxable?

All withdrawals made from a Tier 2 account are taxable under normal tax laws. Withdrawals made from a Tier 1 account are partially taxed. Check NPS Features to learn more.