National Pension Scheme | NPS Scheme | How to open NPS Account -

The National Pension Scheme (NPS) is a voluntary, defined contribution based retirement savings scheme launched by Government of India.

The NPS scheme launched for newly employed central government employees with effect from 1 January 2004. But from 1 May 2009, the PFRDA made it open to all citizens of India including the unorganized sector workers on a voluntary basis.

PFRDA (Pension Fund Regulatory and Development Authority) manages the National Pension Scheme.

National Pension Scheme | NPS Scheme

The government introduced National Pension Scheme (NPS) with the objective to extend financial security post-retirement to all citizens of India who opt out for NPS scheme. Under this scheme you can save systematically during your working life for your old age pension and create a retirement corpus.

National Pension Scheme seeks to inculcate the habit of saving for old age amongst the citizens. The returns in National Pension Scheme are market-connected as the contributions are invested in a mix of assets.

How NPS Scheme Works?

Under NPS scheme, your savings are pooled in a pension fund. These funds are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in a mix of assets and accumulate over the years, depending on the returns earned on the investment made. The accumulated wealth depends on the contributions made by you and the income generated from the investment of such wealth. Let’s see the image below.

At the time of a normal exit from it, you may use the accumulated wealth to purchase a life annuity from a PFRDA empanelled life insurance company apart from withdrawing a part of the accumulated wealth as lump-sum.

Features & Benefits of National Pension Scheme

National Pension Scheme offers various benefits to investors. Some key features and benefits of the scheme are

1. NPS scheme is open to all citizens of India and is entirely voluntary.

2. NPS account opening process is very simple. You have to open an account with a PoPs (Point of Presence) or online and get a PRAN.

3. It offers a choice of investment options and pension funds for subscribers.

4. The amount and frequency of contribution in this scheme can be changed as per your requirement.

5. You can switch fund, investment option, and fund manager.

6. You can manage your NPS account online. Further contributions made online through the eNPS portal.

7. Your NPS account (PRAN) remains the same irrespective of change of city, job or fund manager.

8. The account maintenance costs are the lowest as compared to similar pension products across the globe.

9. Pension wealth accumulation grows over the period of time with a compounding effect till the retirement become large.

10. It regulated by PFRDA (Pension Fund Regulatory and Development Authority).

Eligibility for National Pension Scheme

Any citizen of India between 18 – 65 years is eligible to join NPS scheme. The citizens can join NPS scheme subject to submission of all required information and documents required for KYC compliance. Non-Resident Indians are also eligible to join NPS scheme. Note that if there is a change in the citizenship of the NRI, his/her NPS account would be closed.

You can continue to contribute in your NPS account beyond the age of 60 years but up to the age of 70 years. You can open only one NPS account and under no circumstances can have more than one NPS account.

Documents required for opening an NPS Account

Following documents required for opening an NPS account.

1. Duly filled in subscriber registration form

2. Proof of identity

3. Proof of address

4. Age/date of birth proof

How to open NPS Account?

There are two ways to open NPS account.

1. Online Mode

2. Offline Mode

Online Mode

You can open NPS account through online mode using eNPS platform .

For NPS account opening via online mode, you need to

1. Have Mobile number, email Id and bank account with net banking facility.

2. Have an Aadhaar (Mobile number registered with Aadhaar) or PAN card.

You can also make subsequent contributions to your NPS account through online facility easily using Net Banking/ Debit Card/ Credit Card.

Offline Mode

To open NPS account offline, you need to find a point of presence (PoP). Intermediaries such as a bank that help you to open NPS account are called PoP. These PoP are appointed by PFRDA to carry out KYC verification and also accept further contributions from you. You can collect the registration form for joining NPS from any of the PoP-SP. The authorized branches of a POP are called Point of Presence Service Providers (PoPSPs). POP-SP location can be accessed via below mentioned link https://www.npscra.nsdl.co.in/pop-sp.php

Types of NPS Account

There are two types of accounts under NPS scheme

Tier I Account

NPS Tier I account is the primary account. It is a non-withdrawable retirement account. You can not withdraw entire money from this NPS account till your retirement. There are also certain restrictions on withdrawal from this NPS account on retirement. However, partial withdrawal is permitted in specific conditions. Tax benefits are applicable to Tier I account only.

Tier II Account

NPS Tier II account is a voluntary savings account from which you can withdraw your savings whenever you require. It is an investment account like a mutual fund. However, the expense ratio is much lower for NPS as compared to mutual funds. Only a Tier I account holder can open a Tier II account. There are no tax benefits for Tier II account.

Minimum contribution in NPS Scheme

The minimum contribution at the time of Tier I account opening and for all subsequent transactions is Rs. 500. The minimum contribution in Tier I account per year is Rs 1,000. You can contribute any amount over and above this limit.

The minimum contribution at the time of Tier II account opening is Rs. 1000. The minimum amount per contribution is Rs. 250 for all subsequent transactions in Tier II account.

Fund Management Schemes available under NPS Scheme

The NPS scheme provides two options to invest subscriber’s money.

1. Active choice

2. Auto choice

Active choice

In this option, you would decide on the asset classes in which the contributed funds are to be invested and their percentages (Asset class E (maximum of 50%), Asset Class C, and Asset Class G).

Auto choice

This is the default option of Lifecycle Fund wherein the funds are managed automatically based on the age profile of the subscriber. For more details, visit PFRDA website (www.pfrda.org.in).

Withdrawals from National Pension Scheme

You can exit from NPS scheme and withdraw your accumulated pension wealth in the following manner. Note that as per PFRDA exit rules, no other withdrawals permitted.

For subscribers joining between 18-60 years

1. Upon attainment of the age of 60 years

At least 40% of the accumulated NPS corpus needs to be used for the purchase of an annuity from PFRDA listed insurance company and the balance is paid as a lump sum payment. However, if the corpus is less than Rs. 2 lakhs, then the subscriber will have the option to withdraw the whole corpus in a lump sum.

2. Upon Death

The entire accumulated corpus (100%) paid to the nominee/legal heir of the subscriber.

3. Exit from NPS scheme before attainment of the age of 60 years

At least 80% of the accumulated corpus must compulsorily used to purchase an annuity and the balance paid as a lump sum. If the total corpus is less than Rs. 1 lakh, then the subscriber has the option to withdraw the whole corpus in a lump sum. However, the subscriber can exit from NPS only after completion of minimum 10 years in NPS scheme.

For subscribers joining between 60-65 years

The exit rules for subscribers joining the NPS scheme beyond the age of 60 years will be as under

1. Normal exit

The subscriber exiting after completion of 3 years in NPS scheme. In the normal exit, at least 40% of the accumulated corpus must be used to purchase an annuity and the remaining corpus can be withdrawn in a lump sum. If the total corpus is equal or less than Rs. 2 lacs, then the subscriber will have the option to withdraw the whole corpus in a lump sum.

2. Premature Exit

Any exit before completion of 3 years in National Pension Scheme. In such case, at least 80% of the accumulated corpus must compulsorily used to purchase an annuity and the balance can be drawn in a lump sum. However, if the accumulated corpus is equal or less than Rs. 1 lakh, then the subscriber will have the option to withdraw the entire corpus in a lump sum.

3. Exit due to the death of the subscriber

The entire accumulated corpus paid to the nominee/legal heir of the subscriber.

Partial withdrawal from National Pension Scheme

Now partial withdrawals of up to 25% of the contributions made by you are allowed after completing a minimum period of 3 years in NPS scheme. A maximum of three partial withdrawals permitted during the entire tenure of subscription to NPS scheme. Such partial withdrawals for the following purposes only.

1. Higher education for children or for self.

2. The marriage of your children.

3. The treatment of specified critical illness for self and family.

4. Setting up or acquiring a new business.

5. Purchase or construction of a house if the subscriber is not having a residential house.

Tax Benefits under National Pension Scheme

Tax benefits under National Pension Scheme are as below.

1. Salaried Individual

Salaried individual’s own contribution up to 10% of salary (basic plus dearness allowance) is tax deductible from the taxable income under Section 80CCD(1) of Income Tax Act. This is within the overall limit of Rs. 1.5 lakh under Section 80CCE.

2. Self Employed Professionals

Contributions up to 20% of the Gross Annual Income of the self-employed professionals is deductible from the taxable income under section 80CCD(1) of the Income Tax Act. This is within the overall limit of Rs. 1.5 lakh under Section 80CCE.

3. Additional Tax Benefit under Section 80CCD(1B)

For both salaried and self-employed individuals. An additional deduction of Rs.50,000 from taxable income for investing in NPS scheme has been provided u/s 80CCD(1B). This deduction is over and above the ceiling of Rs. 1.5 lakh u/s 80C.

4. Tax Benefit under Section 80CCD(2)

If an employer contribute up to 10% of salary (basic plus dearness allowance) of the employee in NPS under Section 80CCD(2), that amount will also be exempt. Note that this benefit is not available for self-employed individuals.

The above-mentioned tax benefits are applicable for investment in Tier I account only.

Annuity Service Providers under National Pension Scheme

On exit from National Pension Scheme, some portion of NPS corpus has to be used to purchase an annuity. At present the following 12 ASPs (Annuity Service Providers) registered with PFRDA to provide annuity service.

1. Life Insurance Corporation of India

2. HDFC Life Insurance Co. Ltd

3. ICICI Prudential Life Insurance Co. Ltd.

4. SBI Life Insurance Co. Ltd.

5. Star Union Dai-ichi Life Insurance Co. Ltd.

6. Max Life Insurance Company Limited

7. Edelweiss Tokio Life Insurance Co. Ltd

8. Bajaj Allianz Life Insurance Co Ltd.

9. IndiaFirst Life Insurance Co Ltd

10. Canara HSBC Oriental bank of Commerce Life Insurance co Ltd.

11. Kotak Mahindra Life Insurance Co Ltd.

12. Tata AIA Life Insurance Company Limited

These ASP’s are regulated and monitored by IRDAI (Insurance Regulatory and Development Authority of India). Under NPS scheme, the subscriber has the option to choose the Annuity Service provider and type of Annuity.

Final Thoughts

National Pension Scheme is a government-sponsored pension scheme. NPS allows all citizen of India between 18 – 65 years to invest in it and claim tax deduction under Section 80CCD(1). It also qualifies for additional deduction of Rs.50,000 from taxable income under Section 80CCD(1B). You can consider investing in National Pension Scheme if the features and benefits explained above fits your profile and needs.

Note: This post was originally published on June 20, 2018 and has been completely updated for accuracy and comprehensiveness.

National Pension Scheme | NPS Scheme | How to open NPS Account