National Pension Scheme

The National Pension Scheme (NPS) is a voluntary, defined-contribution pension scheme launched by the Government of India. It is overseen and regulated by the PFRDA (Pension Fund Regulatory and Development Authority). While a regular pension scheme involves a predetermined pension amount, NPS or voluntary retirement savings scheme contributions and returns determine the final retirement corpus. Anyone planning for their retirement should consider the NPS. It offers a structured approach to saving for the future and provides tax benefits.

Table of Contents:

• ⇾ Features of National Pension Scheme
• ⇾ NPS Eligibility Criteria
• ⇾ Potential Beneficiaries of NPS
• ⇾ Documents Required to Open National Pension Scheme
• ⇾ Mandatory Documents for NPS
• ⇾ Additional Documents for NPS
• ⇾ Comparison of NPS Tier 1 and Tier 2
• ⇾ Open a National Pension Scheme Account
• ⇾ Steps to Open an NPS Account Online
• ⇾ Open an NPS Account Through PoPs
• ⇾ Benefits of National Pension Scheme Account
• ⇾ National Pension Scheme Funds Withdrawal
• ⇾ NPS Partial Withdrawal
• ⇾ NPS Maturity Withdrawal (at age 60 or above)
• ⇾ Other NPS Withdrawal Scenarios
• ⇾ NPS Equity Allocation Rules
• ⇾ Frequently Asked Questions

Features of National Pension Scheme

The National Pension Scheme, introduced in 2004, aims to provide a sustainable source of income in the post-retirement years for individuals across various sectors. The table below showcases the NPS scheme's characteristics, investment options, tax benefits, and other important details.

NPS Eligibility Criteria

NPS offers a flexible and tax-efficient way to accumulate a corpus for retirement. You have to meet certain eligibility criteria to ensure a smooth enrollment process and adherence to the National Pension Scheme's guidelines.

Here are the few things you need to meet to be eligible to open a National Pension Scheme (NPS) account in India.

• Age: You must be between 18 and 70 years old at the time you apply.
• Minors: Parents on behalf of minors can open and manage an NPS account until the minor reaches 18 years of age.
• Citizenship: You can be a resident Indian citizen, a Non-Resident Indian (NRI).
• Legal Competence: Must be legally competent to sign a contract as per the Indian Contract Act.

Note: The following are not eligible to open an NPS account: Persons of Indian Origin (PIOs), Hindu Undivided Families (HUFs), Overseas Citizen of India (OCI), and individuals already having an NPS account.

Potential Beneficiaries of NPS

• Salaried Individuals: NPS is a good option for salaried individuals who may not have a fixed pension plan through their employer. It allows for regular contributions and potential tax benefits.
• Self-Employed Professionals: For self-employed individuals, NPS provides a way to build a retirement corpus with disciplined savings and tax advantages.
• Government Employees (Joining after 01-01-2004): For government employees who joined service after January 1, 2004, Tier-I of NPS is mandatory. However, they can also opt for the voluntary Tier-II account for additional contributions.

Documents Required to Open National Pension Scheme

To open a National Pension Scheme (NPS) account in India, you'll need certain documents to establish your identity, age, and other necessary details. The documents required to open a National Pension Scheme (NPS) account in India can be broadly classified into two categories: mandatory documents and additional documents.

Mandatory Documents for NPS

These documents are essential for verifying your identity and address according to Know Your Customer (KYC) norms. These typically include:

• PAN Card
• Photograph
• Signature
• Proof of identity documents including Aadhaar card, Passport, Voter ID card, etc.
• Proof of address documents like Bank statements, utility bills, etc.

Additional Documents for NPS

• Passport (NRIs/OCIs): If you are a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI), you will need your passport as well.
• Foreign Address Proof (NRIs): NRIs will also need to provide proof of their foreign address.
• Scanned Signature: A scanned copy of your signature may be required during the online application process.

Note: The documents you need may vary slightly depending on the Point of Presence (POP-SP) you choose to register with. The documents should be clear, readable, and valid.

Comparison of NPS Tier 1 and Tier 2

There are two main types of NPS accounts, NPS Tier 1 and NPS Tier 2. Tier 1 is a mandatory account for all NPS contributors while Tier 2 is voluntary and up to the NPS contributor. Both NPS Tier 1 and 2 have different features and benefits, so, given below is an overview of the different features of NPS Tier 1 and NPS Tier 2:

Open a National Pension Scheme Account

NPS is a voluntary retirement savings program in India designed to provide a regular income after retirement. This scheme is a smart way to ensure your financial security post-retirement. You can open a National Pension Scheme account online or through designated branches of Points of Presence (PoPs).

Steps to Open an NPS Account Online

• Step 1: Visit the official NPS website of the Central Recordkeeping Agency (CRA) you choose.
• Step 2: Click on 'New Registration' and select the appropriate registration type (Individual or Corporate).
• Step 3: Fill out the online registration form with your details and use your Aadhaar card for online KYC verification.
• Step 4: Upon successful registration, you will receive a Permanent Retirement Account Number (PRAN) on your registered email address.

Open an NPS Account Through PoPs

• Find the nearest POP-SP: A POP-SP can be your bank branch or any other agency authorized to register NPS subscribers.
• Collect and fill PRAN application form: Obtain the PRAN application form from your chosen POP-SP and fill it out with your details.
• Submit the form with required documents: Submit the completed application form along with the necessary documents to your POP-SP.
• Complete KYC and make the initial contribution: The POP-SP will assist with KYC verification and collect your initial contribution (minimum Rs.500).
• Receive your PRAN: You'll receive your PRAN via mail or SMS after successful verification and processing.

Benefits of National Pension Scheme Account

The National Pension Scheme is designed to provide Indian citizens with a steady income stream after retirement. This Government of India program offers a structured approach to saving for your post-retirement years, with the potential for higher NPS returns and tax advantages.

Here's the list of benefits that come with a National Pension Scheme account.

• Structured approach to saving: NPS encourages regular contributions throughout your working life, building a disciplined savings habit. This helps you accumulate a significant retirement corpus over time.
• Potential for higher returns: NPS invests your contributions in a mix of equity and debt instruments, depending on your chosen investment option. This offers the potential for higher returns compared to traditional pension schemes that may offer fixed payouts.
• Tax benefits for Employees: Employees can claim deductions up to ₹2 lakh (₹ 1.5 lakh under Section 80CCE + ₹50,000 under 80CCD(1B)). Employer contributions are deductible up to 10% (14% for central government employees) of salary. Self-employed can claim up to 20% of gross income.
• Portability: Your NPS account is portable, meaning you can switch jobs without affecting your retirement savings. Your NPS account goes with you, wherever you work.
• Choice of investment options: NPS allows you to choose your investment mix based on your risk appetite. You can choose from Equity, Asset Allocator (Aggressive, Moderate, Conservative), and Government Bond(s). This allows you to have some control over the growth of your retirement corpus.
• Government-regulated: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and security of your contributions.

National Pension Scheme Funds Withdrawal

The National Pension Scheme (NPS) offers flexibility in withdrawals, ensuring that subscribers have access to their funds under various circumstances. With specific rules for partial withdrawals, maturity withdrawals after the age of 60, and other scenarios, the NPS helps secure a stable post-retirement income while allowing a degree of financial flexibility.

NPS Partial Withdrawal

You can make partial withdrawals from your NPS account for specific reasons, such as higher education, marriage, purchase or construction of a residential property, or medical treatment of serious illness. These partial withdrawals are capped at 25% of the subscriber’s contributions (self-contribution), and they are allowed only after the subscriber has completed at least three years in the scheme. The maximum number of partial withdrawals permitted during the entire tenure is three.

NPS Maturity Withdrawal (at age 60 or above)

Upon reaching the age of 60 or retirement, you can withdraw up to 60% of your accumulated pension corpus as a lump sum, which is tax-free. The remaining 40% must be used to purchase an annuity plan that provides a regular monthly pension. However, if the total corpus is ₹5 lakh or less, you have the option to withdraw the entire amount without purchasing an annuity. This arrangement ensures a balance between immediate financial needs and long-term pension security.

Other NPS Withdrawal Scenarios

• Premature Exit: If you exit the NPS before the age of 60, you must use at least 80% of the pension corpus to purchase an annuity. The remaining 20% can be withdrawn as a lump sum. However, if the total corpus is ₹2.5 lakh or less, the subscriber can withdraw the entire amount as a lump sum without buying an annuity.
• Upon Death: In the unfortunate event of your death, the entire pension corpus (100%) is given to the nominee or legal heir. The nominee has the option to continue the NPS account or withdraw the total funds.

NPS Equity Allocation Rules

The National Pension Scheme (NPS) allows you to allocate a portion of your investments to equities through Scheme E, which focuses on equity investments. You can allocate up to 50% of your NPS contribution to equities, balancing between growth potential and risk exposure.

There are two methods for equity allocation under NPS:

Auto Choice: This option automatically allocates investments based on your age and risk tolerance. As your age increases, the equity exposure reduces, ensuring safer and more stable investments over time. Younger investors typically have a higher equity allocation, while older investors are given a more conservative portfolio.

Active Choice: In this option, you have control over the allocation of your investments. They can decide how much to invest in Scheme E (equities) and how to split the rest among other NPS schemes such as Scheme C (corporate bonds) and Scheme G (government bonds), allowing for a customized portfolio based on individual preferences.

Besides NPS, you can also check and invest in other retirement schemes and other saving schemes with better returns. Check the table below with links for details: