This article explains, What is the National Pension Scheme(NPS) What accounts are available in NPS? Who are the Fund managers? How can one withdraw from NPS? What are tax benefits on investing in NPS? How many subscribers it has?
Table of Contents
An Overview of NPS is given below
National Pension Scheme is a government-approved pension scheme for Indian citizens in the 18-60 age group for retirment. While central and state government employees have to subscribe to NPS (it’s compulsory for them), it’s optional for others. NPS is India’s answer to the US’ retirement scheme-401(K).
- Lock-in Period: One Invests till 60.
- Partial Withdrawal up to 25% after 3 years of account opening for specific grounds such as medical treatment, higher education of children, the marriage of children, home purchase etc. These withdrawals cannot be more than 25% of your contributions and are tax-free.
- Monthly Pension after retirement: After one becomes 60 years one can withdraw 60% from NPS and for the remaining 40% one has to buy a pension plan and one gets a monthly pension.
- Low Cost: Multiple reputed Fund Managers ex HDFC Pension Fund, SBI Pension Fund Fund Management Fee capped at 0.01%:
- Invests in or Asset Classes: Equity (E), Government Bond (G), Corporate Bond (C ), Alternative Investment (A)
- Investment Type: Active (Subscriber allocates), Auto (As per life cycle fund)
- Tier 1/Tier 2 NPS Accounts:
- Tier 1- Premature withdrawal not allowed. Tax deduction benefits up to Rs. 2 lakh per annum.
- Tier 2- It’s like Mutual Funds. Funds can be withdrawn at any time. Tier1 is necessary for Tier2 account.
- Eligibility Indian citizen in the 18-60 age bracket. NRIs can also open
- NPS Account Can be opened online at NSDL or Karvy Website
- NPS Mobile App is also available
The image below shows that if a person starts investing at age of 30 years and invests Rs 5,000 per month in NPS and gets 10% returns then he would have invested 18 lakhs and his investments would grow to 1.39 crores. If he purchases a pension plan of Rs 45.58 lakhs(40% of the maturity amount), which earns returns at 6% then he would get a monthly pension of Rs 22,793.
National Pension Scheme (NPS)
What is Pension scheme?
Webster’s English dictionary defines the word pension as a fixed sum paid regularly, especially to a person retired from work.
A Pension Plan is a plan or a product, that promises you a pension i.e. a fixed regular income after you retire, for a certain period of time. You invest in the pension plan by paying a regular premium or amount. Your amount is invested so that it grows. When you retire, your invested amount would have grown to a certain amount. From this amount, called annuity It is in an annuity scheme, from which you draw down certain income on a regular basis. These plans are offered by
- Life insurance companies,
- Mutual funds
- Indian Government ex: National Pension Scheme or NPS
In NPS where is the money invested
One investing in NPS has to understand various asset classes available, choose how to decide among various asset classes, will he wants to be in control or wants the allocation done automatically and then choose a Fund Manager. The returns of various NPS schemes are discussed in our article Returns of NPS: Best NPS Pension Fund, Best Pension Fund Manager
One can invest in NPS even if one has PPF, EPF or another pension plan.
In NPS how your money is invested depends upon your
- Multiple investment options(equity,fixed income). The investment options are called asset classes and are based on risk, return. There are E, C and G Asset classes to choose from.
- Asset Class E: Investments in predominantly equity market instruments. The maximum investment in this class is 75% of the total contribution. Classified as High return, High risk
- Asset Class G: investments in Government securities and bonds. Classified as “Low return, Low risk”
- Asset Class C: investments in fixed income instruments other than Government securities. classified as “Medium return, Medium risk”
- Asset Class A: invests in alternative assets like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs). It is only offered in NPS Active Choice and the upper limit for investing in it is 5% of your investment.
- The E Asset class has higher potential returns than the G asset class, but it also carries the risk of investment losses. Investing entirely in the G asset class may not give you high returns but is a safer option.
- Choice: Active or Auto of how money is distributed among the asset classes :
- if the investor will himself manage the distribution it is called Active
- if the investor will let the distribution among various assets classes be determined Automatically based on his age called as Auto
- Pension Fund Manager: Once the investor decides the Auto or Active distribution then he needs to choose the fund which will invest on his behalf.
- The money is managed by fund managers appointed by the PFRDA.
- The accounts of government employees are managed by one of the three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions.
What are the accounts available in NPS?
Under NPS, two types of account would be available to people
- Tier I: contribute into the pension account with restrictions on withdrawal. A tax benefits are available for Tier 1 account only.
- Tier II: a voluntary saving account from which one is free to withdraw whenever he wishes. It is like Mutual Fund.
- An active Tier I account is must for the opening of Tier II.
- It is optional even for govt employees. The government and employers will make no contribution to this account.
- Swavalamban scheme or the NPS Lite:is the extension of the variant available to the government employees. The government contributes Rs 1,000 per year to the pension account in NPS Lite, making pension possible for the economically-disadvantaged. Under the scheme, Govt. will contribute Rs.1000 per year to each NPS account opened in the year 2010-11 and for the next three years, that is, 2011-12, 2012-13 and 2013-14. As a special case and in recognition of their faith in the NPS, all NPS accounts opened in 2009-10 will be entitled to the benefit of Government contribution if they fulfil the eligibility criteria prescribed under these guidelines.
Tax Benefits of National Pension Scheme
The NPS is currently under the EET (exempt, exempt, tax) which means it is tax free on contribution and accumulation but taxable on maturity. Hence, an NPS subscriber is taxed on withdrawal and also when he obtains annuity.
NPS tax benefits are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1B). All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is like an open ended mutual fund. You can take out the money at any time. Our article NPS Tax Benefits and sections 80CCD(1), 80CCD(2) and 80CCD(1B) discusses Tax Benefits of NPS in detail.
Our article Should you Invest in NPS the National Pension Scheme for additional 50,000 and save tax talks about Whether it makes sense to invest in NPS for tax benefits.
|Section||Deduction allowed||Maximum Limit||Can be claimed by|
|80CCD(1)||Employee contribution up to 10% of basic salary and DA||Upto 1.5 Lakhs including 80C.||Employees. For self-employed 10% of their annual income up to a maximum of Rs 1.5 Lakhs.|
|80CCD(2)||Employer’s contribution up to 10% is basic salary and DA.||Upto 10% of basic salary and DA.||Only employees.|
|80CCD(1B)||Additional tax benefit up to Rs. 50000 over and above the benefit under 80CCD(1).||Upto Rs. 50000||Employee( Government or private) or self-employed or ordinary citizen.|
Therefore, the total tax benefits that can be claimed for NPS under Section 80CCD(1) + Section 80CCD(1B) equals to 2 Lakhs in a financial year.
If Employees have savings Rs. 1,50,000 under 80C excluding NPS Deductions, Then the Employee can show their NPS Deductions, under 80 CCD(1B), which is over the 1,50,000 Limit.
If the Employee have less than 1.5 Lakh savings in 80C and exceeds 50,000 towards NPS, then the Employee can split their NPS Amount to 80CCD(1) and 80CCD(IB).
Maturity of NPS
When to withdraw from National Pension Scheme?
The NPS Tier 1 account matures when the subscriber turns 60 years but can be extended until the age of 70.
Tier-I comes with partial withdrawal options, subject to conditions.
- When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA and can withdraw only up to 60 per cent of the corpus.
- The nominee can withdraw the full amount only after the death of the subscriber.
One can withdraw from NPS online or by submitting the form at the Point of Presence(POP) centres of NPS.
Who provides Annuity on withdrawal or maturity under NPS?
Annuity, popularly called a monthly pension, is a series of payments made at successive periods (intervals) of time. For NPS it is bought at withdrawal or on reaching 60 years in Tier 1 Account. ASPs would be responsible for delivering a regular monthly pension on exit from the NPS. The Annuity Service Providers empaneled by PFRDA for subscribers of NPS are as under:
- Life Insurance Corporation of India
- SBI Life Insurance Co. Ltd.
- ICICI Prudential Life Insurance Co. Ltd.
- Bajaj Allianz Life Insurance Co. Ltd.
- Star Union Dai-ichi Life Insurance Co. Ltd.
- Reliance Life Insurance Co. Ltd.
Who manages the money invested in National Public Scheme – the fund managers?
The money is managed by fund managers appointed by the PFRDA. You have to opt for a fund manager while opening the account.
- LIC Pension Fund Limited
- SBI Pension Funds Pvt. Limited
- UTI Retirement Solutions Limited
- HDFC Pension Fund
- ICICI Prudential Pension Funds Management Co. Limited
- Kotak Mahindra Pension Fund Limited
- Reliance Capital Pension Fund Limited discontinued in 2019
- IDFC Pension Fund : Moved out of managing NPS scheme from 1 Nov 2012. It’s assets worth Rs 1,500 crore were moved to SBI Pension Fund.
The accounts of government employees are managed by one of the three government fund managers: LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions,
The money invested by others is managed by one of the following fund managers, ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.
What are the charges and fees associated with National Pension Scheme?
Investors have to pay handling and administrative charges, fund management fees. Fund management fee are 0.0102% for Government employees and 0.25% of the invested amount for private sector. When the scheme was introduced in 2009, this charge was just 0.0009%. However, in Nov 2012 it was revised to 0.25% to make the scheme more sensible for the fund management houses.
The minimum contribution to NPS accounts
For All citizens model
|Tier I||Tier II|
|Minimum Contribution at the time of account opening||Rs. 500||Rs. 1000|
|Minimum amount per contribution||Rs. 500||Rs. 250|
|Minimum total contribution in the year||Rs. 1000||0|
|Minimum frequency of contributions||1 per year||NA|
Who can invest in National Pension Scheme?
National Pension Scheme is compulsory for Government employees(NPS)?
Earlier Government of India used to provide a definite pension to employees after retirement which was based on employee length of service and average of emoluments(Basic Pay+ Dearness Pay+ Stagnation Increment + Non-practising Allowance) drawn during ten months immediately preceding the date of retirement.
From 1 Jan 2004 Government made it mandatory for new government employees (except armed forces) to contribute to National Pension Scheme with matching contribution by government. This is a move from a defined benefit pension to a defined contribution based pension system.
Can a Non-Government employee also invest in National Pension Scheme (NPS)?
Yes a non Government employee, between the age of 18 to 60 years, can also invest in National Pension scheme. He can join as as an individual investor or if his company(Corporate house) joins NPS.
For corporate NPS contribution will be in addition to Employee Provident Fund, or EPF, investments.
- If the employer is offering NPS, he will be making an equal contribution in the scheme from his side.
- The structure will be of Tier-1 type where premature withdrawal will not be allowed.
- Since December 2011 the employer’s contribution up to 10% of basic plus DA is eligible for deduction under Section 80CCE over and above the Rs 1 lakh limit of 80C.
- Employee contribution up to 10% of basic plus dearness allowance, or DA, is eligible for deduction under Section 80CCD within the Rs 1 lakh limit.
- Employer can claim tax benefit for its contribution by showing it as business expense in the profit and loss account.
Who regulates National Pension Scheme (NPS)?
The Nation Pension System (NPS) is regulated by the Pension Funds Regulatory Development Authority(PFRDA).
What is the Auto choice in NPS?
Here, The fraction of funds invested across three asset classes will be determined by a pre-defined portfolio based on the investor’s age, called as Life-cycle fund.
- At the lowest age of entry (18 years), the auto choice will entail an investment of 75% of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class.
- These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36.
- From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.
What is the difference between NPS Tier 1 account and Tier 2 Account?
Tier 1 account is mandatory for all central and state government employees.
To open Tier II account one needs Tier I account.
The Tier I account differs for government and non government employee in terms of contribution, fund management, withdrawal. The picture given below highlights the difference between different Tier I accounts and between Tier I and Tier II account from Daily mail When NPS gets new tax benefits, it becomes more attractive
Flexibility and Portability of National Pension Scheme ?
Investors have the flexibility to choose between fund managers, investment options, between Auto or Active choice. Such change can be made only once a year. NPS account can be operated from anywhere in the country irrespective of employment and geography.
How to open new NPS account?
You can open NPS account online through eNPS, mobile App or manually.
For manually one had to visit the nearest POP division.
Now eNPS has been introduced. Now you can register the NPS account online through eNPS. You can also pay online your NPS contribution , even though you have opened account manually.
What is e NPS?
e NPS is electronic National Pension Scheme at https://enps.nsdl.com/. By accessing the link you can
- Open Individual Pension Account under NPS (only Tier I / Tier I & Tier II)
- Making initial and subsequent contribution to your Tier I as well as Tier II account
Our article eNPS : Open NPS account online, contribute to NPS online explains it in detail
NPS Mobile App
NPS App gives your details of Subscribers account online. The Subscriber can access latest account details as is available on the CRA web site using user ID (PRAN) and password. The APP access your account details online and provides you with a user friendly interface to browse through your account information. It also enables you to maintain your latest contact details and password. It can be downloaded from Google PlayStore.
The APP gives better user experience and provides additional functionality such as
1. View current Holdings
2. Request for Transaction Statement for the year on your email ID.
3. Change contact details like Telephone, Mobile no. and email ID.
4. Change your Password / Secret Question
5. View your Account details.
6. Regenerate password using secret question.
7. View Last 5 contribution transactions carried out
8. Get notifications related to NPS.
Video of NPS Mobile App
This 3-minute official video shows features of NPS Mobile App
Difference between National Pension Scheme and Mutual Funds
Similarities between National Pension Scheme and Mutual Funds are as follows:
- It is like a mutual fund the pooled money is invested in different options: Both Mutual fund and NPS provides options wherein you could invest in equity or debt instruments and also in different company stocks indirectly.
- Professional management of your money.
- Returns are not guaranteed just like in a Mutual Fund.
Difference between NPS and Mutual funds are as follows
|Mutual Funds||NPS (Tier I account)|
|No limit depends on investor||Equity limit is restricted to 50%|
|The wide array of funds to choose from||Only in Funds selected by PFRDA|
|Can change fund anytime||Can change fund only once a year|
|No forced discipline unless through SIP||If the employee then automatically contribution gets deductedElse minimum contribution limit|
|Tax benefits only in ELSS||80C benefit and if an employer contributes his contribution gets 80CCE|
|Can withdraw anytime||Restricted withdrawal|
|No pension benefit on maturity||Forced to take annuity on withdrawal or maturity of 60 years which generates pension|
Changes in NPS in 2016
- PFRDA, in its circular dated November 4, 2016, added two more options of life cycle funds under Auto Choice option viz. Aggressive Life Cycle Fund and Conservative Life Fund. These options are in addition to Existing life cycle fund (Moderate life cycle fund or LC 50), which shall still be the default fund. But Government subscribers shall not have these two options. For Government subscribers, the equity allocation is still capped at 15%.
- PFRDA has added a new asset class ‘A’ for Alternative Investments for private sector subscribers. This asset class is in addition to three existing asset classes i.e. Equity (E), Corporate Bonds (C) and Government Debt (G). Investment in Asset Class (A) shall comprise the following:
- Commercial mortgage based securities or Residential mortgage based securities
- Units issued by Real Estate Investment Trusts regulated by SEBI
- Asset backed securities regulated SEBI
- Units issued by Infrastructure Investment Trusts regulated by SEBI
- Alternative Investment Funds (AIF Category I and II) registered with SEBI
- DEFERRING PURCHASE OF ANNUITY : On retirement, NPS investors have to compulsorily buy an annuity with 40% of the corpus. PFRDA has now allowed investors to defer the purchase for up to three years. They can buy annuities till the age of 63 .
- 40% OF CORPUS MADE TAX FREE ON MATURITY : 2016-17 Budget had made 40% of the NPS corpus tax-free on maturity. This changed the NPS from an EET product to a quasi EET instrument where 60% of the corpus is taxable while 40% escapes tax. It has also made NPS better than pension plans offered by insurance companies, where the tax free withdrawal is restricted to 33%. However, there are several competing products such as EPF, PPF and ELSS funds that are fully tax free on withdrawal.
- DEFERRING WITHDRAWAL TILL 70
While 40% of the corpus will be put in annuity, the remaining 60% can be withdrawn. But, given the low fund management charges of the NPS, there is no need to take out the entire 60% at the time of retirement. NPS investors can now delay withdrawals till the age of 70.
- EARLY WITHDRAWALS ALLOWED
NPS investors can now withdraw up to 25% of their own contribution for specific needs such as children’s higher education or marriage, construction or purchase of first house, treatment of critical illness for self, spouse, children or parents.
- LOWER MINIMUM INVESTMENT OF Rs 1,000
PFRDA has lowered the minimum investment from Rs 6,000 to Rs 1,000 a year.
- SHIFT FROM EPF/SUPERANNUATION FUND
The Government has also allowed investors covered by EPF and other superannuation funds to shift to the NPS
- Beginner to Investing
- Investing:Think about Liquidity,Safety,Returns,Risk,Tax
- Goals Based Financial Planning
- Choosing Tax Saving options : 80C and Others
- Taxation of investments : EEE, ETE, TEE..
In this article we have explained about NPS, how , what etc. In next article we shall explain how NPS compares with other investment option? how to open NPS account and how to operate it. Do you have an NPS account? Did your employee open it for you or you invested it yourself? What do you think of National Pension Scheme? How are you saving for retirement.