Pension Scheme

The National Pension Scheme is a voluntary retirement investment scheme in India. In this scheme, you are required to invest a certain amount of your income regularly to create a fund for your retirement. After you retire, you can withdraw a part of your fund in a lump sum while the rest is to be invested in a pension scheme.

This scheme was introduced by the central government. Earlier open for only government employees, but it was made available for all the citizens after 2009.

The NPS is a market-linked scheme that comes under the regulation of the PFRDA. That is the amount you contribute is invested in the market securities. NPS is one of the best options for retirement planning as it not only helps you build your wealth but is also a regular source of income that can be used to meet the regular expenses.

NPS is a type of saving and investment plan that helps you accumulate a sufficient sum for your retirement. If you are a salaried individual and are looking for a plan that will help you save regularly for your retirement then you can consider investing in NPS.

This is an even more important investment for the people who are working in private firms where there is no pension. NPS will help you create a regular pension after retirement. You can also take advantage of tax benefits under Section 80C.

One of the main advantages you get from an NPS account is that it helps you to save taxes. You are eligible for a tax benefit of up to Rs 1.5 lakhs. This is available on the contribution that you make towards your NPS account under Section 80C of the Income Tax Act.

The deduction is available under the following two heads for NPS contribution:

1. Section 80CCD (1): This deduction is available for self-contribution. This is the amount that you invest in your NPS account. The maximum deduction allowed is up to 10% of your salary. If you are self-employed then the deduction is up to 20% of your total income.
   
   
2. Section 80CCD (2): This deduction is available for the contribution made by the employer to your account. This is only available to you if you are a salaried individual. The deduction allowed is the lower of
   
   
   • 10% of Basic Salary + DA
   • Amount contributed by your employer
   • Gross total income

Additional deduction of Rs 50,000 over and above the standard deduction of Rs. 1.5 Lakhs can also be availed.

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.

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 equity, you have the option to decide what percent 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.
   
   
9. Higher Returns: NPS can offer you returns that are mostly higher than the other traditional investments such as bank FDs, Public Provident Fund, etc. This is due to the presence of market-linked securities. The returns generated by NPS are not fixed but are very attractive. If we go by the performance of the past 12 years (since NPS became available to all) then NPS has given returns in the range of 10-12%. You also have the option to manage the funds yourself or change the funds to improve your return further.

Check Out -NPS Calculator

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:

1. NPS Tier I Account (Primary Pension Account)

The Tier I account is the primary pension account designed for long-term retirement savings. It is mandatory for individuals enrolling in NPS and offers tax benefits. However, withdrawals are restricted until retirement.

Key Features of Tier I Account:

• Mandatory for NPS subscribers

• Minimum contribution: ₹500 at the time of account opening and ₹1,000 annually

• Tax benefits:

  1. Up to ₹1.5 lakh under Section 80CCD(1) of the Income Tax Act

  2. Additional ₹50,000 under Section 80CCD(1B)

• Withdrawal restrictions:

  1. Only 60% of the corpus can be withdrawn at retirement (tax-free)

  2. The remaining 40% must be used to purchase an annuity for a pension

  3. Partial withdrawals are allowed under specific conditions (education, medical emergencies, etc.)

The Tier I account is best suited for individuals looking for a secure retirement savings plan with tax advantages.

2. NPS Tier II Account (Voluntary Savings Account)

The Tier II account is a voluntary savings account that offers greater flexibility in withdrawals but does not provide the same tax benefits as Tier I. It is only available to those who have an existing Tier I account.

Key Features of Tier II Account:

• Optional for NPS subscribers

• Minimum contribution: ₹1,000 at the time of account opening, with no annual minimum requirement

• No withdrawal restrictions: Funds can be withdrawn at any time

• No tax benefits (except for government employees under Section 80C with a lock-in period)

• Investment options: Same as Tier I, offering flexibility to invest in equity, corporate bonds, and government securities

The Tier II account is ideal for individuals looking for a low-cost investment option with easy liquidity while enjoying NPS fund management benefits.
 

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.

1. Equity Funds (Asset Class E)

Equity funds under NPS primarily invest in stocks of listed companies, aiming for higher returns over the long term. These funds are best suited for investors with a higher risk tolerance and a long-term investment horizon.

Key Features:

• Invests up to 75% of contributions in equity markets

• Higher growth potential but comes with market risks

• Ideal for young investors looking for long-term wealth creation

• Returns are linked to stock market performance

2. Corporate Bonds (Asset Class C)

Corporate bond funds invest in fixed-income securities issued by private or public sector companies, offering stable and moderate returns. These funds are suitable for investors looking for a balance between risk and return.

Key Features:

• Invests in high-rated corporate bonds

• Offers moderate returns with lower risk than equity funds

• Suitable for investors with medium risk tolerance

• Less volatile compared to equity investments

3. Government Securities (Asset Class G)

Government securities funds focus on risk-free investments by allocating funds to government bonds and treasury bills. These funds are ideal for conservative investors who prioritise capital safety over high returns.

Key Features:

• Invests in central and state government bonds

• Minimal risk as government securities are stable

• Returns are generally lower but more predictable

• Ideal for low-risk investors and retirees

4. Alternative Investment Funds (Asset Class A)

Alternative investment funds (AIFs) are a newer addition to NPS, allowing investments in real estate investment trusts (REITs), infrastructure investment trusts (InvITs), and other alternative assets. These funds offer diversification beyond traditional asset classes.

Key Features:

• Invests in alternative assets like real estate, infrastructure, and private equity

• Higher risk but offers potentially higher returns

• Suitable for investors with a high-risk appetite

• Limited allocation (usually up to 5% of the portfolio)
   

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

1. 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)
   
   
2. 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:
   
   
   1. Aggressive: Maximum equity exposure of 75% up to the age of 35
      
      
   2. Moderate: Maximum equity exposure of 50% up to the age of 3
      
      
   3. Conservative: Maximum equity exposure of 25% up to the age of 35

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

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.

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.

Other than the 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:
 

* 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 death: In case of the demise of the subscriber, the entire accumulated corpus is transferred to the subscriber's nominee.

How to Use NPS Withdrawal Money?

NPS stays active till you retire. That is, you cannot withdraw your money before your retirement age. After you retire you need to keep at least 40% of your corpus for purchasing an annuity and the rest can be fully withdrawn.

You can use the money withdrawn to achieve many of your goals such as:

• Child’s marriage
• Purchasing a house
• Planning a family vacation
• Leaving a legacy for grandkids

If you do not want to use this at the time of retirement you can keep this money invested for further 10 years, i.e., till you turn 70.

KYC Documents Required to Enrol for National Pension Scheme

To open your account under the NPS scheme, you need to submit the following documents.

• Registration/Application form
• Passport Size photograph
• Identity Proof (AADHAR card)
• Address proof
• Birth Certificate