Answers to all common questions regarding NPS.
What is NPS and how it works
The National Pension System (NPS) is a voluntary defined contribution pension system that is administrated and regulated by the Pension Fund Regulatory and Development Authority(PFRDA).
This pension cum investment scheme aims to encourage Indian citizens to secure their future through systematic savings. Under NPS individual savings are pooled into a pension fund and invested by professional fund managers -in accordance with the approved investment guidelines.
On behalf of investors the PFRDA regulated pension fund managers invest the accumulated fund across diversified portifolio including Government Bonds, Bills, Corporate Debentures and Shares. Contributions grow and accumulate over the years based on the returns earned on the investment.
When subscribers open an NPS account online through eNPS or offline through a POP(Point Of Presence), they are issued a unique Permanent Retirement Account Number by a Central Record Keeping Agency(CRA) such as CAMS. The PRAN is mandatory to make contributions in Tier I and Tier II NPS accounts.
At retirement, withdraw up to 60% of compounded corpus (for corpus above Rs. 5 Lakh) as lump sum, and invest the remaining in annuity to receive monthly pension
NPS Eligibility Criteria
This social security initiative from the Central Government of India is available to all Indian citizens including employees from public, private and unorganised sectors. NRIs and OCI card holders are also eligible. However, PIO cardholders are not eligible for enrolment in National Pension System (NPS).
A citizen of India, whether resident or non-resident, subject to the following conditions:
Applicant should be between 18 – 60 years of age as on the date of submission of his/her application to the POP/ POP-SP.
Applicant should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. All the documents required for KYC compliance need to be mandatorily submitted
Type of NPS accounts
In NPS there are two types of accounts – Tier I and Tier II.
|Tier I||Tier II|
|To join NPS it is mandatory to open a Tier I retirement account, which is focused on helping investors build their retirement savings. NPS subscribers are mandated to make an initial contribution of Rs. 500 and a minimum subsequent contribution of Rs. 500 to this account. Moreover, to keep the Tier I account active, subscribers are required to make a minimum of one contribution per year, as well as contribute a minimum amount of Rs. 1000 every year. Subscribers can avail tax benefits and make partial withdrawals from this account under certain stipulated conditions such as child’s marriage, child’s higher education and certain medical reasons. To know about the various tax benefits associated with NPS contributions made to Tier I account, please visit our section on Tax Benefits||II is a voluntary account, but in order to open this type of account NPS subscribers need to possess an active Tier 1 account. To get started, subscribers are required to make a minimum initial contribution of Rs 1000, however there are no minimum number of subsequent transactions necessary to keep this account active. Nonetheless, if a subscriber chooses to make subsequent contributions then the minimum value of each contribution needs to be Rs. 250. Unlike Tier I, there are no restrictions on withdrawals from Tier II accounts, and there is no tax benefit for contributions made towards Tier II accounts. Central Government Employees however can choose to invest in NPS Tier II (Tax Saver (NPS-TTS)) and garner tax benefits after completing the stipulated 3 year lock-in period.|
NPS Investment Choices
National Pension System offers a variety of schemes under two types of investment choices – Active Choice and Auto Choice. Subscribers who pick Active Investment choice can proactively determine the allocation of funds across schemes. However, subscribers with minimal knowledge about managing their investments can select Auto Choice, where investments are automatically made according to their age and associated risk profile.
If displeased with fund performance, subscribers are permitted to change their investment pattern and asset allocation ratio up to twice a year.
- Its your retirement savings so you decide
- You can decide percentage of fund allocation
- You can take a passive investment approach (Auto Choice)
- If you want, go for Active Choice
- You have power to choose Pension Fund Manager
- Available asset classes – E- Equity, C- Corporate Bond, G- Government Bond & A- Alternative Investments
- Fund is managed automatically as per chosen risk appetite by pension fund manager
- Available asset classes include E- Equity, C- Corporate Bond and G- Government Bond
Asset allocation under Active Choice
If subscriber wants to manage asset allocation as per his/her wish, they can select Active choice. However being investment for retirement, PFRDA has put some maximum limit on Equity and Alternate investment classes.
This limit is based on subscriber age. Please refer below table to know limits.
Asset allocation under Auto Choice
If subscriber does not want to manage asset allocation on his own, they can opt for Auto choice. In this choice, their asset allocation across the assets would be adjusted based on their age.
All they need to confirm if they are Aggressive (able to take more risk) or moderate or conservative type investor. Based on their risk profile, their corpus would be dynamically changed as per their age.
Below table shows how will be your asset allocation across various classes based on age and risk profile
What are Tax benefits on contribution to NPS
NPS tax benefit is available for Tier I Account
NPS Tax Benefit under section 80CCD (1),
NPS tax benefit for employer contribution – Salaried employees can claim a deduction on their contribution to NPS of up to 10% of the salary (Basic + Dearness Allowance). However contribution needs to be done by Employer from your salary directly to NPS account.
The self-employed can claim a tax deduction up to 20% of their gross income or Rs. 1,50,000 whichever is less. This deduction is within the limit of tax deduction Under U/S 80C
NPS additional Tax Benefit under section 80CCD (1B)
An individual can also claim tax benefit or deduction on an additional self-contribution upto Rs. 50,000/-
The tax deductions mentioned above under diﬀerent sections of the IT Act are exclusive of each other. So you can avail both of them. NPS maximum tax benefit is sum of 10% of the salary plus 50,000 self contribution.
An illustration of Tax Saving with NPS is shown below
NPS tax benefit is available for Tier 2 Account
Only to a government employee, deduction up to Rs. 1.50 lakh under Section 80 C is allowed for investing in NPS Tier 2 Account, provided that there is a lock-in period of 3 years. If they do not avail any tax benefit, then there is no lock in for NPS Tier 2.
Lock in period for NPS
NPS scheme lock in period is as under.
Lock in period for NPS Tier 1
As per PFRDA (Exits & Withdrawals under NPS) Regulations 2015, in following conditions Subscriber can exit from NPS:
- Upon Superannuation – When a subscriber reaches the age of Superannuation/attaining 60 years of age, he or she will have to use at least 40% of accumulated pension corpus to purchase an annuity that would provide a regular monthly pension. The remaining funds can be withdrawn as lump sum.
If the total accumulated pension corpus is less than or equal to Rs. 5 lakh, Subscriber can opt for 100% lumpsum withdrawal.
- Pre-mature Exit – In case of pre-mature exit (exit before attaining the age of superannuation/attaining 60 years of age) from NPS, at least 80% of the accumulated pension corpus of the Subscriber has to be utilised for purchase of an Annuity that would provide a regular monthly pension.The remaining funds can be withdrawn as lump sum.However, you can exit from NPS only after completion of 10 years.
If the total corpus is less than or equal to Rs. 2.5 lakh, Subscriber can opt for 100% lumpsum withdrawal.
- Upon Death of Subscriber – The entire accumulated pension corpus (100%) would be paid to the nominee/legal heir of the subscriber.
Lock in period for NPS Tier 2
The National Pension Scheme Tier 2 account does not have any lock-in period. Withdrawals are taxed according to the time at which withdrawal is made. In short, subscribers can withdraw their deposits at any time.
However, to a government employee, deduction up to Rs. 1.50 lakh under Section 80 C is allowed for investing in NPS Tier 2 Account, provided that there is a lock-in period of 3 years. If they do not avail any tax benefit, then there is no lock in for NPS Tier 2.
Best NPS Fund
Most common question asked by investors is which is NPS fund manager. Similar to mutual funds, past performance does not guarantee future performance. However with limited information available, we should consider past track record and consistency in deciding which is best NPS fund especially for Tier 1 account.
This is because amount is getting invested for a very long period and even 1 percent better return can make significant difference to the retirement corpus. That is power of compounding.
Pension Fund Managers available for Private Sector:
Subscribers enrolling via eNPs, PoP and Corporate can choose from one of the following PFMs
- HDFC Pension Management Co. Ltd.
- ICICI Prudental Pension Fund Management Co. Ltd.
- Kotak Mahindra Pension Fund Ltd.
- LIC Pension Fund Ltd.
- SBI Pension Funds Pvt. Ltd.
- UTI Retirement Solutions Ltd.
Aditya Birla Sunlife Pension Management Ltd.
Pension Fund Managers available for Government Sector:
- LIC Pension Fund Ltd.
- SBI Pension Funds Pvt. Ltd.
- UTI Retirement Solutions Ltd
Best NPS fund manager for Tier 1
Starting point would be checking returns of NPS schemes here.
- SBI Pension Fund performed better in A (Alternate investment) category
- HDFC Pension Fund performed better in E (Equity) category
- HDFC Pension Fund performed better in C (Corporate Bonds) category
- LIC Pension Fund performed better in G (Government Bond) category
So how do you chose one of these. You will need to understand your asset allocation across schemes. If you are heavily allocated in Equity and corporate bond then HDFC could be better bet. If however you are more allocated in Government Bond category, LIC could be better choice.
Please note however this is not advice but more of a simplistic approach to DIY fund selection. There are more things to check besides returns while investing.
Better option for most retail investors would be having this managed by a retirement advisor who could take better call based on your asset allocation, fund performance, market situation.
NPS Contribution rules
How many times should a Subscriber invest in a year?
There are no lower or upper limits to the number of contributions per year. The Subscriber is free to decide the frequency and amounts of contributions.
Minimum contribution limit in NPS
A Subscriber is required to make initial contribution (minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.
Subsequently, a Subscriber can make contribution subject to the following conditions:
Minimum contribution limit in NPS for Tier I:
- Minimum amount per contribution – Rs. 500
- Minimum contribution per Financial Year – Rs. 1,000
- Minimum number of contributions in a Financial Year – one
Over and above the mandated limit of a minimum of one contribution in Tier I, a Subscriber may decide on the frequency of the contributions across the year as per his / her convenience.
Minimum contribution limit in NPS for Tier II:
- Minimum amount per contribution – Rs. 250
- No minimum balance required
Can I pay NPS contribution online?
You can download NPS Mobile Appfrom Google Play Store/ App Store.
You can do the contribution transaction even without logging in to the App. Enter Permanent Retirement Account Number (PRAN), date of birth, captcha and click on ‘Verify PRAN’ An OTP will be sent to the registered mobile number / email address.
Then proceed to contribute via Net Banking
Is it mandatory to deposit every year in NPS?
Yes. Minimum Rs. 1000 per year.
NPS withdrawal rules
National Pension System (NPS) is a retirement scheme designed to encourage subscribers to make regular contributions to their pension account and build large corpus that can be obtained at the time of retirement. A maximum of 60% can be withdrawn on maturity as a lump sum and the remaining funds is to be used to purchase annuity (pension).
To provide maximum flexibility for subscribers, NPS permits partial withdrawal of funds before the term to maturity under certain conditions:
NPS Tier I account
- After a lock-in period of 3 years, all subscribers are allowed to make partial withdrawal for stipulated purposes such as
- Child’s marriage,
- Child’s higher education,
- Acquisition or construction of house, and
- For medical treatment of specified diseases
- For the purposes mentioned above, subscriber can withdraw upto 25% of the contribution amount
- A maximum of 3 withdrawals are permitted during the entire tenure
NPS Tier II account
- Subscribers can withdraw 100% of their funds at any time, since there is no lock-in period
- All withdrawal from Tier 2 are subject to income tax
- A maximum of 3 withdrawals are permitted during the entire tenure
NPS exit rules upon retirement and premature exit
Normal Exit on Retirement/Superannuation
Typically, subscribers who started their National Pension System (NPS) journey prior to the age of 60 are allowed normal exit (or superannuation exit) from NPS at the age of 60. However, for corporate subscribers an exit would be considered a normal exit from NPS at the retirement age stipulated in their company policy. Moreover, subscribers who began their NPS journey after the age of 60 can opt for a normal exit from NPS after completing a minimum of three years in the system.
The following rules for Normal Exit from NPS apply to subscribers from all sectors:
- If the accumulated corpus is equal to or below Rs. 5 Lakhs, subscribers are permitted to withdraw the entire amount as lump sum
- If the corpus is more than Rs. 5 Lakhs, at least 40% of the accumulated pension wealth of the subscriber must be utilized for purchase of an annuity that facilitates periodic pension for the subscriber. The subscriber can claim the balance 60% as a lump sum.
Premature Exit from NPS
Subscribers from non-government sectors who began their NPS journey prior to the age of 60, can opt for premature exit after participating for at least 5 years in the National Pension System. On the other hand, Government employed subscribers are allowed to opt for premature exit from NPS at any time.
Furthermore, an exit from NPS initiated by a subscriber who joined NPS after the age of 60 and participated in the system for less than three years would be considered a premature exit.
In addition, the following sector-specific rules apply for premature exit from NPS:
If the accumulated corpus is equal to or below Rs. 2.5 lakh, subscribers can claim the entire amount as a lump sum
If the corpus is higher than Rs. 2.5 lakh, the subscriber must utilise at least 80% of the accumulated pension wealth for purchase of an annuity that facilitates monthly pension for the subscriber. The remaining 20% may be withdrawn as lump sum by the subscriber.
Non- Government Sector:
If the accumulated corpus is equal to or less than Rs. 2.5 Lakh, the subscriber can claim the entire amount as a lump sum
If the corpus is more than Rs. 2.5 Lakh, the subscriber must utilise at least 80% of the accumulated pension wealth for purchase of annuity that facilitates monthly pension for the subscriber. The balance 20% may be withdrawn as lump sum by the subscriber.
The following rules are applicable for subscribers who joined NPS after attaining the age of 60 years and opted for exit from NPS before completing 3 years of participation in the system:
- If the accumulated corpus is equal to or below Rs. 2.5 Lakhs, the subscriber can claim the entire amount as a lump sum
- If the corpus is higher than Rs. 2.5 Lakhs, the subscriber must utilise at least 80% of the accumulated pension wealth for purchase of an annuity that facilitates monthly pension for the subscriber. The remaining 20% may be withdrawn as lump sum by the subscriber.
Exit due to Disability
In the case of disability, the exit from NPS can be considered as a normal or superannuation exit under the following conditions:
If the employer certifies that the subscriber has been discharged from the services of the concerned office on account of invalidation or disability, the exit shall be determined as superannuation exit.
Non- Government Sector:
If a subscriber is physically incapacitated or has suffered a bodily disability leading to their inability to continue with their individual pension account under NPS, the exit shall be determined as superannuation exit. However, the subscriber is required to submit a disability certificate from a Government surgeon or Doctor (treating such disability or invalidation of subscriber) stating the nature and extent of disability. The aforementioned certificate must also assure the following:
- The affected subscriber is not in a position to perform his regular duties and there is a real possibility that the affected subscriber would be unable to work for the remaining period of his life;and
- The percentage of disability is more than 75% in the opinion of the Government surgeon or doctor (treating such disability or invalidation of subscriber)
NPS exit rules upon demise of investor
This section summarises the NPS exit rules following the death of the subscriber, and are applicable to the legal heir or nominee of the deceased subscriber.
Subscribers from government sector
- If accumulated corpus is less than or equal to Rs.5 Lakhs, the nominee or legal heir are entitled to the lump sum in its entirety
- If total accumulated corpus is more than Rs.5 Lakhs, it is mandatory for the nominee or legal heir to use at least 80% of the accumulated corpus to purchase default annuity* from an annuity service provider. The nominee or legal heir is entitled to the balance corpus of 20% as a lump sum.
- If dependent spouse or parents are deceased, 20% of the accumulated corpus is payable to the nominee or legal heir. The surviving children or legal heirs are entitled to the balance corpus.
*Default annuity scheme provides annuity for life for the subscriber and their spouse, with the provision for return of purchase price for annuity.
Subscribers from all citizen and corporate sectors
In the event of death of NPS subscribers from all citizen and corporate sectors, the accumulated corpus is payable in full to the nominee or legal heir and is exempt from tax. Nominees may also opt to purchase annuity with the accumulated corpus
Deferment of purchase of annuity (for all citizens and corporate sector)
In the event of death of an NPS subscriber (from all citizen and corporate sectors) who had deferred purchase of annuity, the accumulated corpus is payable in full to the nominee or legal heir, and is exempt from tax. Nominees may also opt to purchase annuity with the accumulated corpus
NPS Charges to Subscribers
Though NPS charges are very low compared to say Mutual Funds, it is important to know them. You can see all the NPS charges here.