Everything you need to know about the National Pension Scheme

When you hear the word ‘retirement’, several images may pop up in your mind: lazy days, beach resorts, a long drive and family gatherings. There is a famous saying that goes, "Retirement isn’t the end of the road, but just a turn in the road." Yet, how many among us are truly ready for this transition?

Retirement has the potential to bring novel joys and unexplored horizons, but all it needs is a little planning. During this stage of life, a huge amount of passive income is required to lead a desirable retirement life.

Therefore, the Government of India has initiated a long-term contribution plan namely the NPS Tier 1 and Tier 2 schemes under the National Pension System (NPS) to promote a sense of retirement planning among salaried individuals of the nation.

Here are the important details regarding the NPS scheme.

What is the National Pension Scheme?

National Pension Scheme or NPS in short, is a long-term voluntary pension scheme sponsored by the Central Government and regulated by the Pension Fund Regulatory Development Authority (PFRDA). Any employee from the public, private or unorganised sector can start investing in NPS to create a retirement corpus.

NPS was designed to encourage people to invest and save for meeting monetary requirements by generating a stable source of income post-retirement. It inculcates a healthy habit among the employed population of the country. Moreover, NPS scheme is an excellent tax-saving investment eligible for tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act.

NPS scheme was launched in the year 2004, initially, it was only meant for government employees but in 2009 it became accessible to all individuals. The contributions made by an individual are invested in a mix of assets till maturity and the corpus amount continues to grow through market linked-returns. After maturity, the investor gets to withdraw a certain portion of his/her corpus as a lump sum and use the rest to purchase an annuity.

What Are the Details of the NPS Scheme?

NPS scheme is a PFRDA-regulated contribution pool managed by professional fund managers. The funds are invested into a mix of equity and debt securities like corporate bonds, government bonds, alternative assets, etc. Investors have the flexibility to choose a portfolio mix or opt for automatic allocation.

The National Pension Scheme provides two types of accounts that you can invest in, namely; Tier-1 account and Tier-2 account

Tier 1 Account

The Tier-1 account is the primary part of the National Pension Scheme.

Once you register for an NPS Tier-1 account, you will receive a Permanent Retirement Account Number (PRAN). Having a Tier 1 account and PRAN is mandatory for opening an NPS Tier 2 account.

You can start investing in the NPS scheme by opening a Tier-1 account with a minimum amount of ₹500. In order to keep the account active, you will have to make a minimum investment of ₹1000 per year with no specific maximum limit.

In the Tier-1 NPS scheme account, your entire investment will be locked until you reach 60 years of age. Post that, you will be able to withdraw 60% of your accumulated corpus and the remaining 40% can be used to purchase an annuity to generate a stable monthly income. Up to 25% of the corpus can be partially withdrawn before your retirement age under specified circumstances.

NPS Scheme Tier 2 Account

As stated previously, an NPS Tier-1 is mandatory for a Tier-2 account. NPS Tier-2 account is a voluntary investment account which you can open by investing at least ₹1000. Afterwards, you can contribute any particular amount at any point in time. There is no lock-in period for withdrawals which means you will be able to withdraw funds at any point in time. However, a Tier-2 account does not offer any kind of tax benefits.

NPS Tier 1 vs NPS Tier 2: Difference

Here are some of the differences between an NPS Tier-1 account and an NPS Tier-2 account based on certain parameters like tax benefits, withdrawal modes, etc.

What Are the Benefits of Having an NPS Account?

Here are some of the benefits of having an NPS scheme account:

1. Individuals contributing to the NPS scheme are eligible for tax benefits for making self-contributions which include:
   • A deduction under Section 80CCD (1) of 10% of salary comprising basic and DA, where the maximum amount of deduction can be up to ₹1.5 lakh under Section 80CCE.
   • Additional deductions under Section 80CCD(1B) of up to ₹50,000, over and above the maximum deduction limit of ₹1.5 lakh under Section 80CCE
2. Individuals having an NPS account are eligible for a tax deduction on the employer’s contribution.
3. Any National Pension Scheme account holder is eligible for tax exemptions on withdrawal amounts of up to 25% of their contribution.
4. NPS account holders are eligible for a tax exemption under Section 80CCD (5) on the purchase of an annuity after 60 years of age.
5. Any NPS account holder is eligible for a tax exemption under Section 10 on making lump sum withdrawals of up to 60% of the entire corpus after superannuation.
6. Unlike other retirement schemes, NPS allows its account holder flexibility in making investment choices. The two types of investment choices are: Active Choice and Auto Choice. You can select Active Choice if you prefer to choose your asset allocation yourself; else, opt for Auto Choice where fund managers will be responsible for managing your investments.

What Are the Eligibility Criteria for NPS?

Anyone can be eligible for an NPS account if he/she is an Indian citizen whether resident or an NRI. He or she must be between 18 and 70 years old. He or she must hold the necessary KYC documents to comply with the KYC norms. Here are all the eligibility criteria for NPS:

• The applicant must be between 18 years to 70 years of age on the date of application via point of presence (PoP) or through the e-NPS portal.
• The applicant must be an Indian citizen, he or she can be an Indian resident or non-resident or an NRI.
• The applicant must possess and submit all the KYC documents to comply with the KYC norms as per SRF (Subscriber Registration Form).

Types of Annuity Investment Plans

There are five different options for annuity investment plans:

1. Lifetime Annuity: You receive a consistent payment for the duration of your life. If the annuitant passes away, the policy ends without further benefits.
2. Lifetime Annuity with Spousal Benefit: Payments continue to the surviving spouse after the annuitant's death, with no further benefits upon the last survivor's demise.
3. Lifetime Annuity with Purchase Price Return: Annuity payments are made for life, and upon the annuitant's death, the initial purchase price is refunded to the nominee, terminating the policy.
4. Joint Lifetime Annuity with Spousal Benefit and Purchase Price Return: Payments continue as long as one annuitant is alive, with the surviving spouse receiving 100% of the original annuity after the primary annuitant's death. Upon the last survivor's demise, the purchase price is refunded to the nominee.
5. NPS Family Income: Annuity payments are made to the annuitant and their spouse for their lifetimes. After their demise, payments continue to the subscriber's mother and then father. Upon the last survivor's death, the purchase price is refunded to the annuitant's child or nominee.

How to Open an NPS Account?

Pension Fund Regulatory Authority (PFRDA) allows any Indian to open an NPS account via both online and offline modes.

Via Online Mode

Here is the step-by-step guide for opening an NPS account online.

1. You can open an NPS account by simply visiting the Protean e-Gov portal.
2. You will get an online application form. Fill up the mandatory fields and submit them.
3. Now, you will receive an acknowledgement ID.
4. Complete the KYC process; this can be PAN-based or Offline Aadhaar based.
5. You will have to provide some of the details like scheme details, bank account info, nominee details, etc.
6. Then, you will have to upload some essential documents like a copy of your PAN, cancelled cheque, bank account statement, photograph, and signature.
7. A minimum contribution amount of ₹500 is required. You will be directed to the payment gateway, where need to make the payment and proceed.
8. Post completion of your payment, you will be allotted a 12-digit PRAN along with a PDF confirming the details provided.
9. Post registration, you will have to complete an OTP-based confirmation.

Via Offline Mode

You can open an NPS account via offline mode, for that you will have to visit your nearest point of presence (PoP) that is registered with PFRDA. Then fill up a subscriber form and submit it along with your KYC papers.

Afterwards, you have to make an initial investment (₹1000 annually). Once you have invested, PoP will then send your Permanent Retirement Account Number (PRAN) in a welcome kit.

Final Words

Retirement planning has always been a tough challenge for many people. Hopefully, this article was able to provide some clarity on how to save for retirement via the NPS scheme. However, it is a bit tricky to know how much money is sufficient after retirement as there are several factors to consider like inflation, unexpected emergencies and more.

Therefore starting at the earliest is the best one can do. So before starting, consider calculating your total maturity amount and return beforehand by simply navigating to the NPS Prosperity Planner. Remember, the sooner you start investing the larger the corpus you can accumulate.

Frequently Asked Questions

1. What is the NPS interest rate?

The rate of interest of the NPS scheme depends on the performance of the market-linked asset portfolio. Therefore, there is no fixed rate of return as different NPS schemes invest in different assets, which perform differently. But the past trends have been typically in the range of 9% to 12% per annum.

2. How much monthly income can I expect post-retirement from NPS?

The amount of your monthly pension will depend on certain factors like investment duration, amount of contribution, and asset classes you have invested. After knowing all these parameters, you can simply navigate to an online NPS calculator to get an estimate of your monthly income post-retirement from NPS.

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

There are some major differences between NPS Tier-1 and NPS Tier-2 accounts. NPS Tier-1 is an individual pension which is essential for contributing to NPS while NPS Tier-2 account is a voluntary savings facility as an add-on to the Tier-1 account.

An NPS Tier-1 account offers several tax benefits while on the other hand, there are no tax benefits from an NPS Tier-2 account. Withdrawals are restricted on Tier-1 accounts, while Tier-2 accounts don’t have any withdrawal restrictions.

4. What are the various types of withdrawal forms available?

There are various types of withdrawal forms available based on the type of withdrawal. Some of the various kinds of forms include the superannuation withdrawal form, premature withdrawal form, partial withdrawal form, and form in the case of death of the account holder..

5. How to process a partial withdrawal?

You can partially withdraw your NPS savings via online or offline modes. For this, log in to the Protean e-Gov portal, fill up a partial withdrawal form and submit the same. For the offline process, visit your nearest point of presence (PoP) and seek a partial withdrawal form, fill it up and submit it along with the necessary proofs.

- Story by Kakoli Laha