The National Pension Scheme (NPS) is a government-backed retirement savings initiative designed to provide financial security during old age. Launched in 2004, NPS aims to ensure a steady income stream for individuals post-retirement.

This voluntary long-term savings program offers tax benefits, flexibility in investment choices, and a systematic approach to wealth accumulation. With contributions from both employees and employers, NPS provides a structured platform for building a retirement corpus.

As a transparent and portable scheme, it allows subscribers to manage and monitor their investments effectively. NPS serves as a reliable tool for individuals to plan for a financially stable future.

National Pension Scheme (NPS) Details

The National Pension Scheme (NPS) is a retirement savings plan with market-linked, defined contributions.  NPS is overseen and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), falling under the purview of the Ministry of Finance within the Government of India.

NPS comprises two tiers – Tier 1 and Tier 2 – each serving distinct purposes.

Tier 1 is the primary account with strict withdrawal restrictions, making it a long-term retirement savings avenue. Under Tier 1, subscribers can choose between active and auto choice investment options, providing flexibility based on risk preferences.

Meanwhile, Tier 2 offers more liquidity, allowing investors to withdraw funds at any time. Notably, Tier 2 operates as an add-on account, providing subscribers with the flexibility to manage short-term financial goals while still benefiting from the NPS framework.

The NPS scheme thus caters to diverse financial needs, offering a balanced approach to retirement planning.

NPS Scheme Features

NPS scheme carries several features these include:

Tier I – Pension account: Mandatory account with tax benefits available.

Tier II – Investment account: Optional account with no tax benefits, but the corpus is withdrawable anytime.

Minimum Contribution during A/C opening: Rs.500 for Tier I. Rs. 1,000 for Tier II.

Minimum total contribution in a year: Rs. 1,000 for Tier I (Min. amount per contribution Rs.500). Not applicable for Tier II (Min. amount per contribution Rs.250).

Fund Management Charges: A very low-cost product with charges ranging from 0.03-0.09%.

Market Linked Returns: Attractive market-linked returns.

Flexibility of Investments: Subscriber may select a Pension Fund Manager (PFM) of their choice. Subscriber is allowed to change PFM once during a Financial Year. Subscribers may also define their asset allocation, changeable four times in a Financial Year.

Portability: Portable across jobs and geographies.

Accessibility: Accounts can be accessed 24 X 7 X 365 through Web & Mobile App of Central Recordkeeping Agency (CRA).

One-time shift to NPS: Existing corpus under Superannuation can be transferred to NPS without any Tax Incidence.

Continuation post retirement: Provision to contribute till 75 years or to defer withdrawal up to the age of 75 years.

Complete withdrawal for corpus less than Rs.5 lacs: In case the total accumulated corpus is less than Rs.5 Lacs on attaining the age of 60, the subscriber may withdraw the entire corpus.

Account Types Under NPS

The National Pension Scheme (NPS) offers two distinct types of accounts, each serving different purposes within the overall retirement planning framework.

Tier-I Account

The Tier-I account, often referred to as the ‘pension account,’ is the primary account designed for long-term savings with a focus on retirement. Contributions made to this account are subject to specific withdrawal restrictions until the subscriber reaches the age of 60.

The Tier-I account encourages systematic and disciplined savings, with partial withdrawals allowed under certain circumstances like education, housing, or critical illness, but with limitations.

Tier-II Account

The Tier-II account operates as a voluntary savings facility, allowing subscribers greater liquidity and flexibility. Unlike the Tier-I account, the Tier-II account permits unlimited withdrawals without any exit restrictions.

This account serves as a supplementary account for individuals who seek a more liquid investment vehicle, enabling them to manage their short-term financial goals efficiently. While the Tier-I account mandates a minimum annual contribution to remain active, the Tier-II account can be opened and operated independently without any such obligation.

The dual-tier structure of the NPS provides individuals with a comprehensive retirement planning tool, offering a balance between long-term wealth accumulation and short-term liquidity needs.

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National Pension Scheme Benefits

NPS scheme provide several benefits to its subscribers

Returns/Interest

One of the primary advantages of the National Pension Scheme (NPS) lies in its potential for favorable returns. The scheme offers a mix of investment avenues, including equity, fixed deposits, corporate bonds, and government funds.

This diversified portfolio allows contributors to benefit from varying market conditions. While returns are not guaranteed, historical data suggests that the NPS has the potential to provide competitive long-term returns.

The disciplined approach of the scheme encourages individuals to contribute regularly, fostering a habit of saving for retirement and potentially yielding substantial returns over the years.

Regulated by PFRDA

The NPS stands out for its robust regulatory framework, providing a sense of security to contributors. The Pension Fund Regulatory and Development Authority (PFRDA) oversees and regulates the NPS, ensuring transparency and accountability in the management of pension funds.

This regulatory oversight helps protect the interests of investors by implementing stringent guidelines for fund managers and maintaining a standardized system for contributions.

The regulated nature of the NPS contributes to its credibility and reliability, assuring individuals that their retirement savings are being managed in a secure and accountable manner.

NPS is Flexible

One notable advantage of the NPS is its flexibility, offering contributors the freedom to choose their investment options and adjust their asset allocation based on their risk tolerance and financial goals.

Participants can opt for different fund choices, such as equity, corporate bonds, or government securities, allowing them to tailor their investment strategy. Additionally, the scheme permits partial withdrawals before retirement, providing flexibility to meet unforeseen financial needs.

The flexibility in contribution amounts, fund choices, and withdrawal options makes the NPS adaptable to the evolving financial circumstances of individuals.

Risk Assessment

The NPS incorporates a systematic approach to risk assessment, which is crucial for retirement planning.

The scheme employs a life cycle fund strategy that automatically adjusts the asset allocation based on the age of the subscriber. In the early years, a higher proportion of funds is invested in equity, potentially offering higher returns. As the subscriber approaches retirement, the allocation shifts towards safer avenues, minimizing exposure to market volatility.

This dynamic risk management approach aims to balance the need for growth with the necessity to protect accumulated savings, ensuring a more stable financial outlook for retirees. The systematic risk assessment mechanism helps subscribers navigate market fluctuations with a prudent and measured approach.

Tax Benefits of NPS Scheme

Contributors of NPS can enjoy tax benefits under different sections of Income tax.  

Employee Tax Benefits for Self-Contribution

The National Pension Scheme (NPS) offers tax benefits to employees who contribute towards their own retirement. Under Section 80CCD(1), individuals can avail of deductions for contributions made to their NPS accounts, subject to specified limits.

This provision allows employees to reduce their taxable income by the amount invested in the NPS, providing a valuable tax-saving avenue while simultaneously fostering a culture of self-funded retirement planning.

Employee Tax Benefits on Employer Contributions – Section 80CCD(2)

In addition to the tax benefits on self-contributions, employees enrolled in the NPS can also enjoy tax advantages on employer contributions. Section 80CCD(2) allows employees to claim deductions for the amount contributed by their employer to their NPS account.

This employer contribution, when combined with the employee’s self-contribution, contributes towards the overall limit for deductions under Section 80CCD(1). This dual benefit encourages individuals to maximize their retirement savings through the NPS, with both personal and employer contributions enjoying tax benefits.

Tax Benefits for Self-Employed People – Section 80CCD(1), Section 80CCE

The NPS extends its tax benefits to self-employed individuals as well. Under Section 80CCD(1), self-employed contributors can claim deductions for their own contributions to the scheme, aligning with the principles applicable to employees.

Furthermore, Section 80CCE aggregates the deductions claimed under Sections 80CCD(1), 80CCC, and 80CCD(2), providing an inclusive framework for self-employed individuals to optimize their tax savings while securing their financial future through the NPS.

Tax Benefit on Annuity Purchase – Section 80CCD(5), Section 80CCD(3)

Upon retirement, NPS subscribers can utilize the accumulated corpus to purchase an annuity. Section 80CCD(5) grants tax benefits on the income generated from the annuity. Additionally, Section 80CCD(3) allows for further deductions on the employer’s contribution to the employee’s NPS account during their service.

These provisions collectively enhance the attractiveness of annuity purchase within the NPS framework by providing tax advantages to retirees.

Tax Benefits on Partial Withdrawal from an NPS Account

The NPS recognizes the need for financial flexibility, allowing subscribers to make partial withdrawals from their accounts for specific purposes. While the scheme emphasizes long-term savings, it also provides tax benefits on partial withdrawals.

Under Section 10(12A), partial withdrawals made by subscribers are exempt from tax, offering a balance between the need for liquidity and the fiscal advantages of disciplined retirement planning.

Tax Advantages on Lump Sum Withdrawal

When a subscriber chooses to withdraw the lump sum amount from their NPS account, tax benefits come into play. While 60% of the accumulated corpus is tax-exempt under Section 10(12A), the remaining 40% is utilized to purchase an annuity, attracting tax benefits under Section 80CCD(5).

This dual-stage tax advantage on lump sum withdrawal ensures a tax-efficient utilization of retirement savings.

Corporate/Employer Tax Breaks

Apart from benefiting individual employees, the NPS also extends tax advantages to corporate entities. Employer contributions to the NPS, as part of their employees’ retirement benefits, are eligible for deduction under Section 36(1)(iva).

This corporate tax break not only encourages employers to contribute to their employees’ retirement but also enhances the overall attractiveness of the NPS as a pension solution within the corporate sector.

National Pension Scheme Withdrawal Rules

Rules to withdraw funds from NPS are as follows:

Withdrawal Rules After Retirement (60 years)

The National Pension Scheme (NPS) outlines specific withdrawal rules for subscribers upon reaching the age of 60, which is the designated superannuation age. At this stage, subscribers have the option to withdraw a lump sum amount from their NPS corpus.

The withdrawal is capped at 60% of the accumulated corpus, while the remaining 40% must be utilized to purchase an annuity, ensuring a steady income stream for the retiree.

In the event of the subscriber’s demise, the nominee or legal heir has the option to receive the entire corpus as a lump sum, or they can choose to continue the NPS account and manage the funds in a manner that aligns with the deceased subscriber’s intentions.

Early Withdrawal or Exit Rules

While the NPS emphasizes long-term retirement planning, it recognizes that unforeseen circumstances may necessitate early withdrawal or exit. Subscribers are allowed to exit the scheme prematurely, provided they have completed a minimum of three years in the NPS.

However, in such cases, only 20% of the accumulated corpus is permitted for withdrawal, and the remaining 80% must be utilized to purchase an annuity. This rule aims to ensure that even in cases of early withdrawal, a significant portion of the corpus is preserved to provide a regular income stream during the retiree’s post-employment years.

Option to Change the Scheme or Fund Manager

The NPS provides flexibility for subscribers to adapt their investment strategy based on changing financial circumstances or preferences. Subscribers can exercise the option to change their scheme preference (from Tier I to Tier II or vice versa) or opt for an alternate Pension Fund Manager (PFM) within the NPS.

This flexibility allows individuals to align their investments with evolving financial goals, risk appetites, or changes in the performance of different fund managers, ensuring that the NPS remains a dynamic and responsive retirement planning tool.

Equity Allocation Rules

The NPS incorporates equity as one of the asset classes within its investment portfolio. However, there are guidelines in place to regulate the equity allocation based on the age of the subscriber.

In the initial years, when the individual has a longer investment horizon, a higher percentage of the corpus is allocated to equity funds. As the subscriber approaches retirement age, the equity allocation gradually decreases to mitigate market volatility and safeguard the accumulated savings.

This systematic reduction in equity exposure reflects the NPS’s commitment to aligning investment strategies with the risk tolerance and time horizon of the subscriber, promoting a balanced and prudent approach to retirement planning.

Interest Rates Of NPS

The National Pension Scheme (NPS) interest rate is not fixed, as the returns depend on the performance of the chosen investment funds. The scheme offers a mix of asset classes, including equity, corporate bonds, and government securities.

The returns are market-linked, meaning they fluctuate based on the market conditions. While this approach introduces an element of risk, it also provides the potential for competitive long-term returns, aligning with the goal of building a substantial retirement corpus.

NPS Tier 1 Interest Rates

The table below is showing returns for different asset classes within NPS Tier 1 over varying time periods:

Asset Class	Returns in One Year	Returns in 5 years	Returns in 10 Years
Equity (Class E)	15.33 to 18.81 %	13.11 to 15.72 %	10.45 to 10.86 %
Corporate Bonds (Class C)	12.46 to 14.47 %	9.27 to 10.15 %	10.05 to 10.62 %
Govt. Bonds (Class G)	12.95 to 14.26 %	10.29 to 10.88 %	9.57 to 10.05 %

NPS Tier-II Interest Rates

The interest rates for NPS Tier 2 are also market-linked, as they depend on the performance of the chosen investment options. However, it’s important to note that NPS Tier 2 is a more flexible account with fewer restrictions on withdrawals compared to Tier 1.

Subscribers have the freedom to switch between different funds and withdraw funds whenever needed.

The table below is showing returns for different asset classes within NPS Tier-II over varying time periods.                        

Asset Class	Returns in One Year	Returns in 5 Years	Returns in 10 Years
Equity	15.19 to 17.92 %	13.05 to 15.83 %	10.35 to 10.58 %
Corporate Bands	12.71 to 16.36 %	9.55 to 10.17 %	9.86 to 10.60 %
Govt. Bonds	12.61 to 13.42 %	10.40 to 12 %	9.59 to 10.07 %

Eligibility for National Pension Scheme

To initiate your National Pension Scheme (NPS) account, eligibility is extended to Indian citizens, regardless of residency status (resident, non-resident, or Overseas Citizen of India), provided you meet the following criteria:

• You must be an Indian citizen, either residing in India or abroad, or a Non-Resident Indian (NRI).
• Your age should fall within the range of 18 to 70 years.
• Compliance with Know Your Customer (KYC) norms, as outlined in the application form, is mandatory.
• You should possess legal competency to execute contracts in accordance with the Indian Contract Act.
• Overseas citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible for NPS subscription.
• Given its individual pension account nature, NPS cannot be initiated on behalf of a third party. The account must be personally opened by the eligible individual meeting the specified criteria.

Conclusion

The National Pension Scheme (NPS) stands as a robust and versatile retirement planning instrument, embodying the essence of financial inclusivity and long-term wealth accumulation.

With its diversified investment options and market-linked returns, NPS offers a prudent balance between risk and growth.

The tiered structure, comprising Tier I for disciplined retirement savings and Tier II for additional flexibility, caters to varied financial needs. NPS’s tax benefits, coupled with transparent regulatory oversight, enhance its appeal.

As individuals across diverse demographics embrace NPS, it solidifies its role as a pivotal tool in securing a stable and prosperous post-employment future.