Table of Contents
- Blog Introduction
- What Is NPS?
- NPS History
- Objectives Of NPS
- How Does NPS Work?
- Features Of NPS
- Income tax benefits
- Who Can Join NPS?
- How Do You Open NPS Account?
- Documents Needed To Open National Pension System Account
- What Is PRAN Number?
- Types Of NPS Accounts
- NPS Account Portability
- Contribution Limits
- Transaction Charges
- In-Active Accounts
- Who Manages Funds In NPS?
- Default Pension Fund Manager ( PFM )
- Where Does NPS Invest Your Money?
- Fund Management Options.
- Fund Switching Options
- How To Calculate Returns In NPS?
- What Happens During NPS Maturity?
- Extension Beyond 60 Years Of Age
- Pre-Mature Exit
- Partial Withdrawal
- Death Of The Subscriber
- Documents Needed For Withdrawal
- What Determines The Monthly Pension?
- FAQ About NPS
- Open Your Demat and Trading account with Zero Cost
Hello Friends, Welcome to my Blog Investinfy.com the best financial blogs where you will be able to read about the end to end information on many investment schemes and financial topics. In this Blog post we will be focusing on National Pension System.
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In this blog post I will be explaining my analysis on National Pension System. This will be a complete guide on National Pension System. Please read till end of the blog post to know the complete information about this National Pension System. Lets get started.
What Is NPS?
NPS stands for National Pension System. NPS is a retirement scheme established by the Government of India for all Indian Citizens. NPS is a “Defined contribution based” retirement scheme in which the individual needs to contribute to his retirement account. Also, his employer can co-contribute for the social security or welfare of the individual. In NPS, there is no defined benefit that would be available at the time of retirement.
The retirement wealth and pension benefits depend on the contributions made and the returns generated from such contributions. This scheme is also called as “New Pension Scheme”.
NPS was started back in 01-Jan-2004. At that time, it was only for new Central Government employees and it was mandatory for them. NPS for all Indian Citizens was introduced from 01-May-2009 onwards. At present, NPS is a mandatory for new Central and State Government employees. However, it is optional for Private employees and individuals.
Objectives Of NPS
The main aim of National Pension System is
- To encourage people to develop the habit of savings for retirement life.
- To provide pension throughout your retirement life.
- To provide reasonable market based returns when you reach 60 years of age.
How Does NPS Work?
- Open National Pension System account either as an individual or through your Employer
- Contribute to your National Pension System account every year till you reach 60 years of age. Your employer can co-contribute as well.
- After 60 years of age, you can withdraw a maximum of 60% of the accumulated wealth.
- Remaining 40% of wealth should be invested in a Pension Fund.
- The Pension Fund will provide you regular monthly pension during your retirement life.
- Depending upon the chosen Pension scheme, the pension stops when you die or it will be given further to your spouse upon your death.
Features Of NPS
- Launched by the Government of India.
- Voluntary scheme for every Indian citizen.
- Flexibility in choosing different investment options and fund managers.
- National Pension System account is portable across locations, jobs and different sectors.
- National Pension System is regulated by PFRDA.
- Low account and fund maintenance charges.
- Income tax benefits
- Reasonable market based returns over the long term
Income tax benefits
- There is a deduction of up to Rs.1.5 lakh to be claimed for NPS – for your contribution as well as for the contribution of the employer. – 80CCD(1) covers the self-contribution, which is a part of Section 80C.
- The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.
- Section 80CCD(2) covers the employer’s NPS contribution, which will not form a part of Section 80C. This benefit is not available for self-employed taxpayers.
- The maximum amount eligible for deduction will be the lowest of the below:
- Actual NPS contribution by employer.
- 10% of Basic + DA
- Gross total income
You can claim any additional self contribution (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh in total.
Who Can Join NPS?
- Indian citizens (whether resident or non-resident) can join NPS based on the following conditions.
- Individual needs to be in the age group 18 to 70 years on the day of opening NPS account.
- Citizens can join National Pension System either as an individual or as an “Employee – Employer” group.
- You can join National Pension System even if you have already been contributing to any other Provident Fund or Pension Fund. Note that National Pension System is independent of other Funds.
- Earlier, the maximum age to join NPS was 65 years. It was increased to 70 years in June-2021.
- This is applicable for All Citizens Model and Corporate model only.
- If you are joining National Pension System after 60 years of age, then you can deposit up to the age of 75 years.
- The investment funds and Pension funds options will be same as that of those who joins before the age of 60 years.
How Do You Open NPS Account?
- Almost all Banks (both Public and Private sector) are enrolled to open NPS account. Also, several other financial institutions provide National Pension System accounts.
- NPS is distributed through authorized entities called “Points of Presence (POP)”.
- POP is the first point of contact for an individual with the NPS system.
- Almost all Banks (both Public and Private sector) are enrolled to act as Point of Presence (POP) to open National Pension System.
- The authorized branches of a POP are known as “Point of Presence Service Providers (POP-SP)”. You need to open NPS through the POP-SP and they will assist you in opening the account and provide further details about NPS.
Documents Needed To Open National Pension System Account
The following documents need to be submitted to the POP for opening of a National Pension System account.
- Filled subscriber registration form.
- Proof of Identity.
- Proof of Address.
- Age proof or date of birth proof.
What Is PRAN Number?
PRAN stands for Permanent Retirement Account Number. When you open National Pension System, you will be issued a PRAN card and it has a 12 digit unique number. This card is generated one time and you can use it throughout your life. Even if you move from one place to another place or transfer NPS account from one POP to another POP, you can use the same PRAN number.
Types Of NPS Accounts
There are 2 types of accounts in NPS. They are
Tier 1 Account : It is a compulsory account. When you join National Pension System, this is the account that gets created for you. It is a non-withdrawable retirement account. You can withdraw from Tier 1 account only when you reach 60 years of age or when you meet exit conditions. It has Income tax benefits.
Tier 2 Account : It is an optional account. You have to have a Tier 1 account to open a Tier 2 account. It is a withdrawable account and you will be free to withdraw any amount from this account whenever you wish. No income tax benefits for this account.
NPS Account Portability
- NPS account provides the following portability features.
- NPS account can be operated from anywhere in India irrespective of your employment and location.
- You can shift from one sector to another sector. For example, Private to Government and vice versa.
- You can shift from one POP to another POP or from one POP-SP to another POP-SP.
- You can shift from Employed to self-employed and vice versa.
- You can contribute to National Pension System from any of the POP or POP-SP irrespective of whether you are registered with them or not.
To encourage the subscribers in all the segments of the society (including unorganised sector), PFRDA has revised and reduced the contribution limits for Tier-1 and Tier-2 accounts. These new limits are effective from 09-August-2016 onwards.
- Minimum contribution at the time of account opening is Rs. 500.
- Minimum amount per contribution is Rs. 500.
- Minimum total contribution in a financial year is Rs. 1,000. (Before August 2016, it was Rs. 6,000).
- There is no maximum limit on contribution.
- Minimum contribution at the time of account opening is Rs. 1,000.
- There is no minimum amount per contribution. Before August 2016, it was Rs. 250.
- There will be no minimum total contribution in a financial year. Before August 2016, it was Rs. 2,000.
- There is no maximum limit on contribution.
You have to pay the following charges during the tenure of NPS.
To CRA (Central Record keeping Agency):
- Rs. 50 when you open NPS account. This is a one time fee.
- Rs. 190 every year for Annual account maintenance cost.
- Rs. 4 for every transaction (like contribution, address change, nominee update, etc).
To POP (Point of Presence):
- Rs. 125 when you open National Pension System. This is a one time registration fee.
- Rs. 20 or 0.25% of the contribution amount whichever is higher. This is an ongoing fee for every contribution starting from your first contribution.
- Rs. 20/- for any other transaction other than contribution (for example, updating Nominee details, change of address details, withdrawal request, etc).
A subscriber has to contribute the required minimum amount in a financial year. If not, the account will become in-active.
To activate such account, you have to pay the following fees.
- Minimum contributions for the in-active period.
- The minimum contribution for the financial year in which the account is re-activated.
- A penalty of Rs.100.
To activate such in-active accounts, you have to approach POP and pay the required fees.
Who Manages Funds In NPS?
Contributions made by the subscribers are invested by Pension Fund Managers (PFM) as per the guidelines from PFRDA. The investment guidelines are designed in such a way that there is minimal impact on the subscribers’ contributions even if there is a market downturn. This is achieved by a proper mix of investment instruments like Government securities, Corporate bonds and Equities.
At present, the following Pension Fund Managers (PFM’s) manage the subscriber funds. Subscriber has option to select any one of the following pension funds.
- ICICI Prudential Pension Fund.
- LIC Pension Fund.
- Kotak Mahindra Pension Fund.
- Reliance Capital Pension Fund.
- SBI Pension Fund.
- UTI Retirement Solutions Pension Fund.
- LIC Pension Fund.
- HDFC Pension Management Company.
- DSP Blackrock Pension Fund Managers.
Default Pension Fund Manager ( PFM )
SBI Pension Fund is the default Pension Fund Manager if the subscriber does not have any preference to choose.
Where Does NPS Invest Your Money?
NPS invests your contributions in the following 3 asset classes based on risks and returns.
Asset Class E : Investments in equity market instruments. it is classified as “High return, High risk”.
Asset Class C : investments in fixed income securities. It is classified as “Medium return, Medium risk”
Asset Class G: investments in Government securities like Government of India bonds and State Government bonds. it is classified as “Low return, Low risk”.
Fund Management Options.
NPS offers the following 2 fund management options to the subscribers.
Active choice : Subscriber will decide the asset classes and their percentage in which the contributed funds will be invested.
Asset class E – maximum of 50% only allowed.
Asset Class C – maximum of 100% allowed.
Asset Class G – maximum of 100% allowed.
Auto choice : This is the default option under National Pension System if the subscriber does not choose “Active Choice”. The management of investments under the asset classes and their percentage will be done automatically based on the age profile of the subscriber.
Fund Switching Options
- NPS subscribers has the option to change Pension Fund Managers (PFM).
- NPS subscribers has the option to change investment choices (Auto ot Active choice) only once in a financial year.
- NPS subscribers has the option to change investments in Asset Class E, C and G based on Age and future income requirements.
How To Calculate Returns In NPS?
- There is no defined or guaranteed return in National Pension System. Returns from National Pension System is market driven.
- There is no dividend or bonus paid in this scheme.
- Returns depends upon the chosen asset class (Equity, Government Securities and Fixed Income).
- For every contribution you make, you will get units based on the NAV (Net Asset Value) on the day of contribution.
- The value of your accumulated wealth is calculated by multiplying total units and NAV.
What Happens During NPS Maturity?
- Retirement age for National Pension System scheme is 60 years.
- Your contribution to National Pension System stops when you reach 60 years of age.
- At least 40% of the accumulated wealth should be invested to purchase a Pension Fund. This is to receive monthly pension during your retirement life. This is compulsory.
- You can withdraw the remaining 60% of the accumulated wealth as a lump sum amount from NPS.
If the accumulated wealth is less than or equal to Rs. 5 Lakhs, then you can withdraw the entire amount (100%) as a lump sum. You need not purchase any Pension Fund. Earlier, the limit was Rs. 2 lakhs. It was increased to Rs. 5 lakhs in June-2021.
Few options to consider: If you want, you can purchase pension fund up to 100% of the accumulated wealth. If you want, you can delay the withdrawal of eligible lump sum amount and keep invested till the age of 75 years. If you want, you can delay.
- Only the lump sum withdrawal.
- Only the pension.
- Both lump sum withdrawal and pension.
- If you want, you can opt for withdrawal of lump sum amount in phases (up to 10 instalments). But, you should purchase Pension fund before the phased withdrawal.
Extension Beyond 60 Years Of Age
- You can voluntarily extend your contribution to National Pension System account even after the retirement age of 60 years.
- You can continue to contribute up to 75 years of age. After that you can’t contribute further.
- This contribution beyond 60 years of age is also eligible for exclusive tax benefits under National Pension System.
- For extension, you can choose any period between 60 years and 75 years of your age. For example, you may want to continue your contributions till you reach 64 years of age.
- If you are planning to extend your contribution beyond the retirement age of 60 years, then you should notify the Bank (where your National Pension System account is kept) at least 15 days before you reach 60 years of age.
- If you have Tier-2 account, you can extend the contributions into the Tier-2 account in addition to the Tier-1 account. Please note that you can operate the Tier-2 account as long as there is a Tier-1 account.
- During the extended contribution period, you can choose to leave the scheme at any point in time. There will not be any penalty. For example, you extended your contribution till the age of 65 years. But, at 63 years of age, you decided not to contribute any further and you want to leave the scheme. You can inform your Bank (where your National Pension System account is kept) and you can leave scheme without paying any penalty.
- Please note that when you leave the scheme during the extended contribution period, you should purchase the Pension Fund immediately. You don’t have the option of delaying or postponing the investment into Pension Fund that provides regular monthly pension.
- When you leave the scheme, you should invest at least 40% of the amount accumulated till the age of Exit for the purchase of Pension Fund. For example, if you leave the scheme at the age of 64 years, then you should invest at least 40% of the amount accumulated till the age of 64 years to purchase the Pension Fund.
- During the extended contribution period, you will have all the facilities and options of a normal National Pension System account like choosing or switching the Pension Fund Manager, investment choices, etc.
Note: Contribution extension beyond retirement is applicable only to the subscribers of “All Citizens” model and “Corporate Employees” model. Please note that Government employees are not allowed to extend the contributions beyond retirement.
- Pre-mature exit is allowed if you want to retire early or if you do not want to continue National Pension System before the age of 60 years.
- Pre-mature exit is allowed only after completion of 10 years from the date of joining National Pension System.
- At exit, you should invest at least 80% of the accumulated wealth to purchase a Pension Fund. This will provide you the monthly pension.
- You can withdraw the remaining 20% of the accumulated wealth as a lump sum amount.
- At exit, if the accumulated wealth is equal to or less than Rs. 2.5 lakhs, then you can withdraw the entire amount as a lump sum. You need not purchase any Pension Fund.
- Earlier, the limit was Rs. 1 lakh. It was increased to Rs. 2.5 lakhs in June-2021.
- Partial withdrawal from Tier-1 account is allowed and the details are given below.
Eligibility: To be eligible for partial withdrawal, you should complete at least 3 years from the date of joining NPS.
Withdrawal Amount: You can withdraw a maximum of 25% of your contributions only. You can’t withdraw from your employer’s contributions.
Withdrawal Frequency: You can opt for partial withdrawal for a maximum of 3 times only during your entire tenure with National Pension System.
Documents Needed: Earlier, you had to submit the supporting documents to apply for partial withdrawal. But, in June 2021, the Government has announced that the supporting documents are not required. A subscriber can apply for partial withdrawal through self-declaration. This is to simplify the process.
Purpose: You can partially withdraw for the following purposes.
- Higher education of your children (including legally adopted children).
- Higher education of your children (including legally adopted children).
- Marriage of your children (including legally adopted children).
- Setting up a new business or purchasing a new business.
- Purchase or construction of a residential house or flat in your name or jointly with your spouse. If you already own a house, then you can’t withdraw.
- For the hospitalisation and treatment of the following diseases for your family. Family includes yourself, spouse, children and dependent parents.
Death Of The Subscriber
In the event of unfortunate death of the subscriber before the age of 60 years, the entire (100%) accumulated wealth will be paid to the nominee. The death claim by nominees under National Pension System is 100% tax free from 01-Apr-2016 onwards. There will not be any need to purchase the Pension Fund for monthly pension.
Documents Needed For Withdrawal
The following documents are required to withdraw funds from National Pension System.
- Filled Withdrawal application form.
- PRAN card in original.
- Proof of Identity (attested copies).
- Proof of Address (Attested copies).
- A cancelled cheque.
What Determines The Monthly Pension?
The monthly pension amount depends mainly on
- The size of the accumulated wealth during retirement. Bigger the accumulated wealth means bigger pension.
- Type of pension scheme that you choose to receive.
- Nomination facility is available in National Pension System.
- You can nominate either at the time of account opening or after opening the account.
- You can nominate up to 3 nominees for your National Pension System Tier 1 and NPS Tier 2 accounts.
- You need to specify the percentage of your savings that you wish to allocate to each nominee.
- The total percentage of shares across all nominees should be 100%.
- You can change nominees at any time.
- There is no fee for nomination at the time of opening the account.
- However, you will be charged Rs. 20/- plus tax if you want to update nominees after the account has opened.
- You need to visit POP and place a request to update nomination details.
FAQ About NPS
Can NRI Open NPS Account?
NRI (Non Resident Indians) can open a NPS account. NRIs can continue their NPS account even if they become a non-citizen of India. OCI (Overseas Citizenship of India) can also open a NPS account.
Can I Have 2 NPS Accounts?
No. You can have only one NPS account at any time. Multiple NPS accounts for an individual are not allowed. In fact, there is no need as the NPS is fully portable across sectors and locations.
Who Regulates NPS?
PFRDA regulates the NPS system. PFRDA stands for Pension Funds Regulatory and Development Authority.
Is there any Loan Facility available From NPS account
There is no loan facility in NPS.
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