Resources
Minus/plus icon
ResourcesExplore the full ACKO experience and make the most of your plan

Home / Health Insurance / Articles / Government Schemes / National Pension Scheme (NPS): Benefits, Eligibility, and Investment Options.

National Pension Scheme (NPS): Benefits, Eligibility, and Investment Options.

Team AckoSept 21, 2023

The National Pension Scheme (NPS), introduced by the Central Government, is designed to provide financial security. It is a voluntary contribution-based pension system designed to enable individuals to accumulate a corpus for their post-retirement life. This article will give you an overview of the scheme for better understanding.

NPS - National Pension Scheme

Contents

icon

What is the National Pension Scheme (NPS)?

The National Pension Scheme refers to a social security program that provides an opportunity for employees across various sectors, including the public, private, and unorganised sectors (excluding armed forces personnel), to secure their future.

This initiative encourages individuals to invest regularly in a pension account throughout their employment. Upon retirement, subscribers have the option to withdraw a certain percentage of their savings, while the remaining amount is provided as a monthly pension.

Since January 1, 2004, it has become mandatory for all Central Government employees to be enrolled in the NPS. It has now been extended on a voluntary basis to all Indian citizens.

The NPS holds significant value for individuals employed in the private sector who seek a reliable pension plan post-retirement. One of the notable advantages of this scheme is its portability, allowing individuals to carry their NPS benefits across different jobs and locations. Moreover, participants can enjoy tax benefits under Section 80C and Section 80CCD.

By prioritising the long-term financial security of individuals, the National Pension Scheme offers a comprehensive solution to those who desire a stable and comfortable retirement.

Types of NPS

The National Pension Scheme (NPS) provides individuals with two types of accounts. 

  • Tier-I: Limited withdrawal options.

  • Tier-II: A voluntary account that offers greater flexibility in terms of investments and withdrawals. However, it is only accessible if the subscriber holds an active Tier-I account.

Under the NPS, contributions made to both accounts accumulate over time, gradually growing through market-linked returns until retirement. While the Tier-I account focuses on long-term savings for pension benefits, the Tier-II account allows individuals to have liquidity and manage their investments more freely.

Who should invest in NPS?

The National Pension Scheme (NPS) is suitable for individuals who want to build a retirement corpus and secure their financial future. It is particularly beneficial for the following. 

  • Salaried individuals: Employees working in the public or private sector can benefit from the NPS as it provides a disciplined approach to retirement savings and offers tax benefits.

  • Self-employed individuals: Professionals, entrepreneurs, and freelancers can utilise the NPS to create a retirement fund and avail tax deductions on their contributions.

  • Young individuals: Starting early with NPS contributions allows individuals to accumulate a larger corpus over time, thanks to the power of compounding.

  • Conservative investors: The NPS offers different investment options, including low-risk government securities, making it suitable for conservative investors who prefer stable returns.

Benefits of the National Pension Scheme

Here’s a list of benefits associated with the National Pension Scheme.

1. Tax Benefits

Classification

Benefits

Self-contribution

A tax deduction of up to 10% of their pay, which comprises the Basic and Dearness Allowance (DA). This deduction falls under Section 80 CCD(1) and is subject to a maximum limit of Rs. 1.50 lakh as per Section 80CCE. In addition to the aforementioned limit, employees can claim an extra deduction of up to Rs. 50,000 under Section 80 CCD(1B). This provides an extra advantage and supplements the overall limit of Rs.1.50 lakh set by Section 80CCE.

Employer contributions

Under Section 80 CCD(2), individuals are eligible for a tax deduction of up to 10% of their salary, which includes the Basic and Dearness Allowance (DA). However, if the contribution is made by the Central Government, the deduction percentage increases to 14%. Importantly, this tax deduction is beyond the limit of Rs. 1.50 lakh provided by Section 80CCE.

For self-employed people

A tax deduction of up to 20% of their gross income under Section 80 CCD(1). However, it is important to note that this deduction is subject to an overall limit of Rs.1.50 lakh as specified by Section 80CCE. Additionally, employees can claim a separate tax deduction of up to Rs. 50,000 under Section 80 CCD(1B). This deduction is above the overall limit of Rs.1.50 lakh mentioned in Section 80CCE.

Partial withdrawal from an NPS account

Under section 10(12B), individuals can enjoy tax exemption on withdrawals up to 25% of their self-contribution. However, it is important to note that specific criteria and circumstances prescribed by the Pension Fund Regulatory and Development Authority (PFRDA) must be met in order to qualify for this exemption.

Annuity purchase

Individuals who reach the age of 60 and choose to purchase an annuity or superannuation through the National Pension Scheme (NPS) are eligible for a tax exemption. This exemption falls under Section 80CCD(5) and provides relief on the purchase of the annuity. However, it's important to note that the subsequent income generated from the annuity is taxable under Section 80CCD(3). This means that while the initial purchase of the annuity enjoys tax benefits, the income received thereafter is subject to taxation.

Lump sum withdrawal

Under Section 10, individuals who reach the age of 60 or retire due to superannuation are eligible for a tax exemption on a lump sum withdrawal. This withdrawal encompasses 60% of the accrued pension funds.

Corporate/employer tax breaks

This deduction falls under section 36(1)(iv)(a) and allows employers to claim a deduction of up to 10% of the employee's pay, which includes the Basic and Dearness Allowance (DA), as a 'Business Cost' from the Profit & Loss Account.

2. Flexibility and control

The NPS provides flexibility and control to individuals over their retirement savings. Subscribers have the option to choose their investment allocation among different asset classes, including equities, corporate bonds, government securities, and alternative investment funds (AIFs). They can also switch between different investment options and pension fund managers based on their risk appetite and market conditions.

3. Regular income after retirement

Upon reaching the age of 60, subscribers of the National Pension Scheme (NPS) can withdraw a certain portion of their collected fund as a lump sum. The balance must be utilised to purchase an annuity from an IRDAI-regulated insurance company. The annuity provides a regular income to the individual during their retirement years, ensuring a financially secure future.

NPS and Withdrawals

The following sections highlight the details related to NPS and Withdrawals.

1. Withdrawal rules after retirement (60 years)

  • Currently, individuals who are part of the National Pension Scheme (NPS) have the option to withdraw up to 60% of their total monetary amount as a lump sum payment. 

  • The remaining 40% is directed towards an annuity plan, which provides a regular income stream. However, under the new NPS guidelines, if the entire corpus is equal to or less than Rs. 5 lakh, subscribers have the flexibility to withdraw the entire amount without being obliged to purchase an annuity plan. Notably, these withdrawals are also tax-free.

2. Early withdrawal or exit rules

  • When a subscriber reaches the age of superannuation or 60 years old, they must use at least 40% of their accrued pension total to buy an annuity that offers a regular monthly pension. The balance funds can be withdrawn in totality. 

  • If the subscriber exits prematurely (before reaching the age of superannuation or turning 60), at least 80% of their accrued pension total must be utilised to buy an annuity that provides a regular monthly income. If the total is less than or equal to two and a half lakh rupees, the subscriber can opt for 100% withdrawal.

  • If the subscriber dies, the entire amount would be paid to the nominee. 

NPS and Equity Allocation

A highest of half of your investments can be in equities. You can opt for an auto option or an active option. The former takes your age into consideration to decide the risk profile associated with the investments. The latter enables you to make an active choice and divide your investments.

What is the eligibility when it comes to NPS?

Here’s the eligibility criteria for an NPS account.

  • Either a resident or a non-resident Indian

  • In the age bracket of 18 to 65

  • Know Your Customer (KYC) requirements should be met

  • Qualified to execute a legal contract

How to Invest in the National Pension Scheme (NPS)?

Here are the steps to get started.

  • Visit the official NPS website or a Point of Presence (POP) and complete the Permanent Retirement Account Number (PRAN) application form. Submit the required documents, such as proof of identity, address, and age, along with the filled form.

  • After obtaining the PRAN, select your investment option and the Pension Fund Manager (PFM) based on your risk profile and investment preferences. The NPS offers various asset allocation strategies and PFMs to choose from.

  • Make contributions to your NPS account through online banking, auto-debit facility, or physical mode. Decide on the frequency and amount of contributions as per your financial capacity.

  • Periodically review the performance of your NPS investments and make changes to your portfolio if required. Keep track of the accumulated corpus and projected pension income.

NPS and other tax-saving instruments

Here’s a table highlighting the differences between NPS and other popular tax-saving instruments.

Type

Approximate rate of interest in percentage

Lock-in duration

Risk

NPS

9 - 12

Till the person reaches retirement

Related to market

ELSS

10 - 12

3 years

Related to market

PPF

7

15 years

Safe

FD

5 - 7

5 years

Safe

What is the NPS interest rate?

The exact NPS interest rate cannot be determined, as it is a product that is linked to the market. Thus, the rate would be dependent upon the performance of the assets in which money is invested. Approximately, it is in the range of 9 to 12 in terms of percentage.

How to login to your National Pension Scheme Account

Here’s how you can login to your NPS account for the first time.

1. Visit the official website of NPS.

2. Click on the "Login with PRAN/IPIN" option on the homepage.

3. Enter your PRAN and the default password that was sent to you by email or SMS when you registered for NPS.

4. Click on "Login" and accept the terms and conditions.

5. You will be prompted to change your default password and set a new one. Choose a strong and secure password that you can remember easily.

6. You will also be asked to set a secret question and answer for future password recovery.

7. Once you have completed these steps, you can access your NPS account dashboard and view your account details, transactions, statements, etc.

Check out: NPS calculator

Frequently Asked Questions (FAQs)

Here’s a list of FAQs associated with the National Pension Scheme in India.

Icon

Who can join NPS?

Any Indian citizen between the age of 18 and 65 can join NPS. Both salaried and self-employed individuals can open an NPS account. 

What are the types of NPS accounts?

Tier I is the compulsory account. It provides tax benefits and pension benefits. Tier II is optional. It gives flexibility to withdraw funds at any time. You can open a Tier II account provided you have a Tier I account. 

How much can I contribute to NPS?

The minimum contribution for a Tier I account is Rs. 500 per month or Rs. 6,000 per year. There is no maximum limit for contribution. The minimum contribution for a Tier II account is Rs. 250 per transaction. There is no maximum limit for contribution or withdrawal. 

How is my money invested in NPS?

You can choose from four asset classes to invest your money in NPS: equity (E), corporate bonds (C), government securities (G), and alternative investment funds (A). 

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions. 

icon

Want to post any comments?

icon

Maximize your advantages with our government scheme-inclusive health insurance plans.

✅ 100% Room Rent Covered* ✅ Zero deductions at claims ✅ 7100+ Cashless Hospitals

quote icon

Check health insurance

quote icon