Written by : Knowledge Centre Team
2025-07-05
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Does the thought of retirement cross your mind sometimes? Do you have enough wealth to manage your monthly expenses if you decide to retire? Well, you might often have such questions when discussing the golden years, right? While you may not have a definite answer to it, you can always begin preparing for it.
You must consider building a corpus that will aid your financial requirements post-retirement. And with that on your mind, the National Pension System (NPS) can be your ideal pick. NPS is a Government of India-backed financial tool that allows you to spend your money across various asset classes to build your perfect retirement corpus. Let’s find out more about it.
Key Takeaways
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What are the Types of Accounts in the National Pension System?
NPS is governed by the Pension Fund Regulatory and Development Authority of India (PFRDA). If you are 18 to 65 years old, you are eligible to invest in the NPS. In recent times, the NPS rules have been flexible to adapt to the evolving times, thus making this savings scheme investor friendly.
NPS offers the following two types of accounts:
- Tier I NPS Account- Tier I is a retirement account. On opening a Tier I NPS account, you are allotted a 12-digit permanent retirement account number (PRAN). You can open this account with a minimum contribution of ₹500. However, to keep the account active, you need to contribute at least ₹ 1,000 in a financial year.
There is no cap on the maximum investment you can make in your Tier I account. The money you invest in this account is locked until you turn 60. On turning 60, you can withdraw 60% of the corpus as a lump sum. You must use the balance of 40% of the corpus to buy an annuity plan from an insurance company that will pay you a monthly pension.
Under Section 80CCD of the Income Tax Act 1961, the investments you make in your Tier I NPS account qualify for tax exemption.
- Tier II NPS Account-Tier II accounts are permitted only if you already have a Tier I account. This voluntary account can be opened by making a minimum deposit of ₹1,000. Later, you can contribute any amount that you wish to.
One significant factor differentiating Tier II accounts is that the investments made in Tier II accounts do not enjoy any exemption. You do not get any benefits from your Tier II account investments.
Recommended Reading - NPS Returns
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How to Open an NPS Account?
You can open your NPS account both online as well as offline following the processes and documents given below:
Follow the Steps Below to Open your NPS Account Online
- Visit the official NPS website. Click on the 'Registration' tab and select 'Individual.'
- Fill in your Aadhaar card and PAN card numbers. On doing so, you will receive a one-time password (OTP) on your registered mobile number.
- Enter the OTP and click on the 'Continue' button. An acknowledgement will be sent to the number with your name. Click on 'OK.'
- You will be redirected to a new page. Fill in your details and then click 'Save and Proceed.' Next, you are required to select your asset allocation - Auto or Active. After you have chosen the option, fill in the nominee details.
- Post that, upload a cancelled cheque from your bank account and your specimen signature.
- Lastly, you need to pay a minimum of ₹500. On making a successful payment via net banking, you will receive your PRAN number and the payment receipt.
Steps to Opening an NPS Account Offline
- Visit your nearest point of presence (POP), appointed by the PFRDA, with the photocopies of the original know-your-customer (KYC) documents. Almost all banks are enrolled as POPs. Also, keep the originals handy for verification purposes.
- You will be given an application form that you must fill out with a black pen.
- After filling up the application form, you will receive a 17-digit receipt number.
- On successful verification of your application, a kit containing your PRAN number will be delivered to your registered address.
- You will also receive a message or an SMS on your registered mobile number informing you about your PRAN number and the kit dispatch.
Documents Needed to Open NPS Account
- Aadhaar Card
- Net-banking details
- Passport size photographs
- Scanned image of your signature
- PAN Card
How to Select Your Ideal Portfolio in NPS?
Choosing the right portfolio in the National Pension System is an important decision for your long-term retirement goals. NPS offers you two ways to invest your contributions, based on your financial knowledge, risk appetite, and preferred level of involvement. You can either decide how every rupee is invested or let the system take care of that for you through an age-based approach.
The following is a brief of both options to help you make a better decision:
- Active Choice (Individual funds)-You can actively decide how your contribution will be invested in an active choice option. You are required to provide the PFM, Asset Class, and percentage allocation to be done in each scheme. There are the following four Asset Classes that one can choose from:
- Asset class E: Equity
- Asset class C: Corporate debt
- Asset class G: Government Bonds
- Asset class A: Alternative Investment Funds
- Auto Choice (Lifecycle funds)- This option is for those who do not have adequate knowledge to manage their investments. Under this option, a pre-defined portfolio will decide the proportion of funds invested across three asset classes.
Based on the risk-taking ability of the Subscriber, NPS offers three different portfolio options with age-wise percentage asset allocation as follows:
- Aggressive Life Cycle Fund (LC75)- Aggressive Life cycle fund comes with a cap of 75% of the total assets for Equity investment.
Age Asset Class E Asset Class C Asset Class G Up to 35 years 75 10 15 40 years 55 15 30 45 years 35 20 45 50 years 20 20 60 55 years & above 15 10 75
- Moderate Life Cycle Fund (LC50)- Moderate Life cycle fund has a cap of 50% of the total assets for Equity investment.
Age Asset Class E Asset Class C Asset Class G Up to 35 years 50 30 20 40 years 40 25 35 45 years 30 20 50 50 years 20 15 65 55 years & above 10 10 80 - Conservative Life Cycle Fund (LC25)- This Life cycle fund offers a cap of 25% of the total assets for Equity investment.
Age Asset Class E Asset Class C Asset Class G Up to 35 years 25 45 30 40 years 20 35 45 45 years 15 25 60 50 years 10 15 75 55 years & above 5 5 90
What are the Tax Benefits of Investing in NPS?
All individual subscribers get tax benefits under Sec 80 CCD (1) with an overall ceiling of ₹1.5 Lakh under Sec 80 CCE. An additional deduction for investments up to ₹50,000 in the NPS Tier I account is also available to NPS subscribers under Subsection 80CCD (1B).
This deduction is over and above the deduction of ₹1.5 lakh under section 80C of the Income Tax Act, 1961.
What are the Alternatives to NPS?
There are a few investment options in India which can beat NPS as a long-term retirement saving plan. However, you can consider unit-linked insurance plans (ULIPs) by Canara HSBC Life Insurance for the goal:
- Invest up to the age of 99 years after starting any time after 18 years of age.
- Invest in a mix of equity and debt funds.
- Investments up to ₹2.5 lakh per annum in ULIPs will keep your plans’ maturity values tax-free.
- Automatic rebalancing options keep your folio benefiting from market volatility.
- Bonus additions for long-term investors aid your folio growth.
- Life cover improves the safety of your family in your absence.
- Partial withdrawals are tax-free and available after five years of starting the plan.
Must Read - Is Pension Taxable?
Conclusion
NPS can be your ideal solution if you want a savings scheme to support your retirement. The options and benefits of the NPS make it the most preferred choice. However, diversification to ULIPs can help you maintain liquidity as well as growth. At Canara HSBC Life Insurance, we offer you flexible options to invest wherever you feel like, depending on your risk profile and other goals. In fact, in ULIPs, we have a policy to ensure that you can switch between funds effortlessly whenever required.
Invest in a better tomorrow with us today.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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