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Pension Scheme

There is no defined age at which you have to start planning for your retirement. However, you should start, as early as possible. Planning for retirement is one of the important aspects of financial planning. If you want to have a secured life post-retirement you will buy the best pension plan in India. Pension schemes are one of the best investment options to consider.

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What is a Pension Scheme?

Pension schemes are investment plans in which you invest a per cent of your income for returns post your retirement. The objective of investing in a pension scheme is to ensure you have regular income post your retirement. Post-retirement, you may have a large amount of money saved in your account, but that will help you to meet contingent needs. A pension scheme gives you a regular income to meet your monthly or regular expenses.

There are two stages in pension schemes in India:

  • The accumulation stage
  • Vesting stage

In the accumulation stage, you pay a monthly/yearly premium amount until you retire. The vesting stage starts once you retire, and in this stage, you start receiving annuities as per the scheme you have invested in.

Who is Eligible for Pension Schemes?

Indian residents above the age of 18 years and below 65 years of age are eligible to invest in pension plans in India. Also, the person should be KYC compliant.

What are the Tax Benefits of Pension Schemes?

The best pension schemes in India not only provide you with social security post-retirement but give you tax benefits on your investment. The amount you invest in pension schemes is eligible for a tax deduction, up to a limit of Rs 1.5 lakh.

Features of National Pension Scheme

National Pension Scheme (or National Pension System) is a government-sponsored pension scheme launched in 2004 by the Pension Fund Regulatory and Development Authority of India (PFRDA).

By investing in NPS, you can pay a premium during the tenure of your work life and receive benefits in a form of regular annuity pension policy post-retirement. Features of National Pension Schemes are:

All Indian Citizens except Armed Forces

The scheme is open for all employees from the public sector, private sector, and employees from the unorganized sector. The scheme is not open for those who are working in the Armed Forces.

Eligible Age

You are eligible for the pension scheme in India if your age is between 18 years and 60 years.

Minimum Contribution

You can make a minimum contribution of Rs 6000 in a financial year. You can either make a one-time payment or pay a monthly instalment of a minimum of Rs 500.

Maturity Age

The pension scheme matures at the age of 60 years. However, you have an option to extend it up to 70 years.

Partial Withdrawals

You can make a partial withdrawal up to 25% after 3 years of opening the account for situations like a child's education, treatment of critical illnesses, or purchasing a house.

Benefits of National Pension Scheme

1

Simple to Invest

Opening an NPS account is very simple. You can do so via online or offline mode as per your comfort.

2

Variable Investment Amount

You can make your NPS contribution as per your comfort. You can pay small amounts every month or pay a lump sum once in a financial year.

3

Well Regulated

This pension scheme in India is regulated by PFRDA and offers reliability and transparency to you.

4

Option of Better Long-Term Growth

Since a part of investment goes in the equity market, you receive higher returns compared to fixed deposits and other tax-saving investments like PPF.

5

Professionally Managed

The money invested in NPS is managed by experienced pension fund houses at a very low cost.

6

Tax Benefit

The amount you invest in NPS is eligible for tax deduction under Section 80C of the Income Tax Act with a maximum limit of Rs 1.5 lakh. The contribution made by both employer and employee is applicable for the tax exemption.

7

Withdrawal for a Safe Retired Life

You cannot withdraw your entire corpus once you retire at the age of 60. The scheme allows you to withdraw only 60% of your accumulated amount, and it is mandatory to keep the remaining 40%. You will receive a regular annuity based on the amount remaining in your account.

8

Automatic Risk Adjustment

Though the portion of your investment goes into the equity, you have an option to decide what per cent you want in equity. You can completely avoid investing the equity if you have a low-risk profile.

If you invest in equity the maximum equity allocation is 75% and it depends on your age. As you close in on your retirement age, the equity exposure in your portfolio reduces.

Types of NPS Account

There are two types of NPS accounts - Tier I and Tier II. Tier I is a default account. When you open an NPS account, the Tier I type account gets opened. Tier II is the voluntary addition to your existing account. In this type, you are allowed to invest and withdraw funds any time you want. A comparison between the two types is as below:

Feature Tier I Tier II
Status Default Voluntary
Withdrawal allowed No Yes
Minimum contribution ₹ 1000 ₹ 250
Maximum Contribution No limit No limit
Tax Exemption Up to Rs 2 lakh u/s 80C and 80CCD(1B) Rs 1.5 lakh for government employees. None for others
Employer Contribution Allowed, Exempt Not applicable

Types of Funds in NPS

There are four types of funds under NPS. You can choose the funds in which you want to invest depending on your risk appetite - low risk, medium risk, or high risk.

Equity (E) This is a high-risk, high-return fund that invests predominantly in equity-related instruments. In a short term, it may be volatile but offers good returns in the long term.
Government Securities (G) This is a low-risk, low-return fund that invests in Government securities.
Corporate Debt (C) This is a medium risk, medium return fund that invests a major per cent of total investment in fixed income bearing instruments issued by corporates, State governments, and PSUs.
Alternative Investment Funds(A) In this type, the investment is made in Real Estate Investment Trust (REITs), Mortgage-Backed Securities (MBS), Infrastructure Investment Trusts (InvITs), etc.

How to Choose Allocation in these Funds?

You have two choices to decide the allocation in the four types of funds. The choices are:

  • Active Choice

    In this option, you get to choose the fund type. You can allocate a certain percentage in each of the four types - E, G, C, and A. However, you can only allocate a maximum of 75% in type E up to age 50 and 5% to type A. If you have a low-risk profile, you can make 100% allocation in only type C or G (or both).

  • Auto Choice

    You can choose the auto option if you can't decide the funds to choose and the per cent to allocate in them. In this, the allocation dynamically changes as per your age. As you grow old, your investment shifts to a safer option. The investment is made only in E, C, or G types. You have three options to choose from in Auto Choice:

  • a Aggressive Maximum equity exposure of 75% up to the age of 35
  • b Moderate Maximum equity exposure of 50% up to the age of 35
  • c Conservative Maximum equity exposure of 25% up to the age of 35

NPS Account for NRIs

Non-Resident Indians (NRIs) can also open an NPS account and avail all the benefits offered by this pension scheme in India. The age of the NRI should be between 18 and 60 years. NRI must also comply with KYC norms. They can contribute towards the NPS account from the NRE account or NRO account. The minimum contribution required from NRIs is as below:

  • To open an account - Rs 500
  • One time contribution - Rs 500
  • Contribution per year - Rs 6000

Features and Benefits of NPS Account for NRIs

Below are the features and benefits of NPS for NRIs:

  • NRIs get to invest in a highly diversified portfolio and flexibility to choose the fund and the per cent to invest in a different type of funds. Remember that portfolio management is way different that financial planning. If you do not have much experience in managing your portfolio, you may always rely on a financial advisor.
  • They can invest up to 85% of their total investment in equity, or government securities, or corporate bonds.
  • They receive a 12 digit unique number known as Permanent Retirement Account Number (PRAN) Card.
  • The account can be operated from any location in the world.

How to Open an NPS Account?

You have an option to open an NPS account both online and offline. You can choose the option as per your comfort. The process is as below for both options.

A. Offline Mode

To open an NPS account offline, the first step is to find a Point of Presence (PoP). The PoP can be a bank also. Next, collect the account opening form, fill in the details and submit the form along with the KYC papers. If you are opening the account through a bank where you already have an account, you don't have to provide a KYC document.

After you make the initial payment, you will receive your Permanent Retirement Account Number (PRAN) from PoP. There is a one-time registration fee of Rs 125 for the process.

NRIs have to follow a few additional steps if they want to invest in the best pension plan in India by opening an account through offline mode:

  • Choose the status of their bank account - repatriable or non-repatriable.
  • Provide an appropriate communication address. They can give their overseas address also.
  • Provide the details of their account type - NRO or NRE, along with a scanned copy of the passport.
  • Once they receive PRAN, they will have to authenticate the same. Authentication can be done through OTP sent on the registered mobile number.
B. Online Mode

Opening an NPS account online is simple and hassle-free. You will need your Aadhaar, PAN, and mobile number in the registration process. Below are the steps to open an NPS account:

  • 1 Visit enps.nsdl.com
  • 2 Select the type of subscriber from the two options - Corporate or Individual Subscriber.
  • 3 Select your residential status - NRI or India Citizen.
  • 4 Select the account type. You can select Tier I or both (Tier I and Tier II).
  • 5 Provide your PAN details and choose a PoP or bank.
  • 6 Click on the registration and proceed with the 'register with Aadhaar' option.
  • 7 Provide your Aadhaar number and click on 'Generate OTP'. You will receive an OTP on your registered mobile number.
  • 8 Enter the OTP you received on your registered number along with bank details, personal information, and nomination details.
  • 9 Once you submit your application, PRAN will be allocated to you.
  • 10 You will also have to submit your photograph and e-signature.
  • 11 To verify e-sign, an OTP will be generated. You will have to verify the same.
  • 12 Once verified, you will be asked to make the payment.
  • 13 Select the payment mode and make the payment.

Comparison of NPS with Other Tax Saving Options

Other than National Pension Scheme, there are a few other tax-saving investment options under Section 80C. The other options are - Equity Linked Savings Scheme (ELSS), Tax saving fixed deposits, and Public Provident Fund (PPF). Let us compare all of these with NPS:

Investment Option Lock-in Period Interest Risk Level
Fixed Deposits 5 years Between 5 and 7 per cent, varies from bank to bank and time to time Low
Public Provident Fund 15 years Guaranteed 8.1% (w.e.f. April 2021) Low
Equity Linked Savings Scheme 3 years Depends on the performance of the fund house. Usually between 10 and 12 per cent High
National Pension Scheme Retirement 9 to 12 per cent* Low to High depending on portfolio choice
* Based on historical fund performance only, there is no guarantee of repetition of these returns.

NPS can offer higher returns than FD and PPF over a long investment period. However, the returns are not guaranteed but linked to the market performance.

NPS Withdrawal Rule

Ideally, National Pension Schemes mature on your retirement, but premature withdrawal is also allowed. NPS withdrawal works as below:

  • Withdrawal at 60 years - Once you reach 60 years of age, you can withdraw 60% of the total accumulated amount. The remaining 40% is used to purchase the annuity.
  • Withdrawal before 60 years - You can make a partial withdrawal after completing 3 years of account opening. You can withdraw up to 25% of the total contribution made 3 times in 5 years in the entire scheme tenure. The withdrawal is allowed in specific circumstances only.
  • Withdrawal in case of a death - In case of the demise of the subscriber, the entire accumulated corpus is transferred to the subscriber's nominee.

FAQs

Can I have two NPS accounts?

No. If you have an existing account, you won't be able to open another account. If required, you can transfer your existing account to a different location. You can even change your investment options.

How much can I invest in National Pension Scheme?

There is no limit on the amount you can invest in Tier-I or Tier-II NPS accounts. However, if you are salaried only 10% of your salary will be eligible for deduction under section 80CCD(1) which is a part of section 80C. For self-employed, this limit is 20% of annual income. You can also claim a deduction on an additional investment of up to Rs. 50,000 under section 80CCD(1B).

Your employer can also contribute to your NPS Tier-I account up to any extent. But only the part within the prescribed limit will be eligible for deduction under Section 80CCD(2). Any excess amount will be taxable as salary income in the year it is invested.

How can I make an online payment towards NPS?

You can follow the below steps to make your contributions in this pension plan in India:

  • Give your PRAN number and select the type of account
  • Select the category of account and the amount you need to pay
  • Click submit
  • The page will fetch your email address, mobile number, and PRAN number.
  • Verify the details and if everything looks correct, click on 'Pay Now'

What is the lock-in period of the National Pension Scheme (NPS)?

NPS Tier-I account is for your retirement, so the funds are locked up until you reach 60 years of age. However, you have the option of premature withdrawal and exit under certain situations. Even at the age of 60, you can withdraw only 60 per cent of the total amount in a lump sum, while the rest has to be invested in an annuity plan.

You can withdraw 25% of your investment three times (in 5 years intervals) after completion of 3 years for specific requirements like treatment of critical illness, house construction, child's education, etc.

Can NRIs open an NPS account?

Yes, NRIs can also invest in this pension plan in India by opening NPS account. They have to be between 18 and 60 years of age to open an NPS account.

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