National Pension System (NPS)

This page provides all the details you need to know about the National Pension System (NPS) scheme.

 

Table of Contents

 

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 History

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 NPS 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 NPS account either as an individual or through your Employer

  • Contribute to your NPS 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

  • NPS account is portable across locations, jobs and different sectors

  • NPS is regulated by PFRDA

  • low account and fund maintenance charges

  • Income tax benefits

  • reasonable market based returns over the long term

 

Income Tax Benefits

Effective 01-Apr-2020, the income tax benefits will depend upon whether you choose old tax system or new tax system.

Old Tax System:

1) Tax Benefits to Self-employed:

Tier-1 Account:

Eligible for tax deduction up to 20% of annual income under Section 80CCD(1) within the overall limit of Rs. 1.5 lakh under Section 80C.

An additional tax benefit of Rs. 50,000 under Section 80CCD (1B) every financial year (effective from 01-Apr-2015) for NPS investments. This is over and above the limit of Rs. 1.5 Lakhs under Section 80C.

At maturity, you have to invest at least 40% of the accumulated wealth to purchase a Pension fund. You need not pay any tax on this amount. You can withdraw the remaining 60% of the accumulated wealth and it is completely tax free.

Pension received from Pension Fund during retirement life is taxable. You need to declare it under "Income from other Sources" and pay tax as per your income tax slab.

Tier-2 Account:

There is no income tax benefits for investing in Tier-2 account.

 

2) Tax Benefit to Employees:

Employees will get tax benefits on their own contributions as well as their employer contribution as stated below.

Tier-1 Account:

Employee Contribution:

Eligible for tax deduction up to 10% of Salary (Basic Pay + DA) under Section 80CCD(1) within the overall limit of Rs. 1.5 Lakh under Section 80C.

Employer Contribution:

Employee is eligible for tax deduction contributed by employer under Section 80CCD(2) over and above the limit of Rs. 1.5 Lakhs provided under Section 80C.

The eligible amount is the least of the following 3 items.

  1. Amount contributed by the Employer

  2. 10% of Salary (Basic Pay + DA). For Central Government Employees, it has been increased to 14% of salary since 01-Apr-2019

  3. Gross total income

 

An additional tax benefit of Rs. 50,000/- under section 80CCD (1B) every financial year (effective from 01-Apr-2015) for NPS investments. This is over and above the limit of Rs. 1.5 Lakhs under Section 80C.

At maturity, you have to invest at least 40% of the accumulated wealth to purchase a Pension fund. You need not pay any tax on this amount. You can withdraw the remaining 60% of the accumulated wealth and it is completely tax free.

Pension received from Pension Fund during retirement life is taxable. You need to declare it under "Income from other Sources" and pay tax as per your income tax slab.

Tier-2 Account:

Income tax benefits for investing in Tier-2 account is available to Central Government employees only (effective 01-Apr-2019). There is no tax benefit to Corporate employees and general public.

For Central Government employees, investment in Tier-2 account is eligible for tax deduction up to Rs. 1.5 Lakhs under Section 80C of Income Tax Act. But, the investment amount will have a lock-in period of 3 years.

 

New Tax System:

1) Tax Benefit to Self-employed:

Tier-1 Account:

No income tax benefits. The investment amount won't get any deduction benefit under Sec 80CCD(1) or 80CCD (1B).

At maturity, you have to invest at least 40% of the accumulated wealth to purchase a Pension fund. You need not pay any tax on this amount. You can withdraw the remaining 60% of the accumulated wealth and it is completely tax free.

Pension received from Pension Fund during retirement life is taxable. You need to declare it under "Income from other Sources" and pay tax as per your income tax slab.

Tier 2 Account:

There is no Income Tax benefits for investing in Tier-2 account.

 

2) Tax Benefit to Employees:

Tier-1 Account:

Employee Contribution:

No income tax benefits. Employee's contribution won't get any deduction benefit under Section 80CCD(1) or Section 80CCD (1B).

Employer Contribution:

The employee is eligible for tax deduction contributed by the employer under Section 80CCD(2).

The eligible amount is the least of the following 3 items.

  1. Amount contributed by the Employer

  2. 10% of Salary (Basic Pay + DA). For Central Government Employees, it has been increased to 14% of salary since 01-Apr-2019

  3. Gross total income

 

At maturity, you have to invest at least 40% of the accumulated wealth to purchase a Pension fund. You need not pay any tax on this amount. You can withdraw the remaining 60% of the accumulated wealth and it is completely tax free.

Pension received from Pension Fund during retirement life is taxable. You need to declare it under "Income from other Sources" and pay tax as per your income tax slab.

Tier-2 Account:

There is no income tax benefit for investing in Tier-2 account.

 

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 NPS either as an individual or as an "Employee - Employer" group

  • You can join NPS even if you have already been contributing to any other Provident Fund or Pension Fund. Note that NPS is independent of other Funds

Note:

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 NPS 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.

 

NRI

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.

 

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 NPS 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 NPS.

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 NPS

The following documents need to be submitted to the POP for opening of a NPS 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 NPS, 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 

  1. Tier 1 Account

  2. Tier 2 Account

The details about each account are given below.

Tier 1 Account:

  • It is a compulsory account

  • When you join NPS, 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 NPS from any of the POP or POP-SP irrespective of whether you are registered with them or not.

 

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.

 

Contribution Limits

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.

Tier-1 Accounts:

  • 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

 

Tier-2 Accounts:

  • 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

 

Transaction Charges

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 NPS. 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)

 

In-active Accounts

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.

Announcements made in August-2016:

To encourage the subscribers in all the segments of the society (including unorganised sector), PFRDA has activated all the "in-active" Tier-1 and Tier-2 NPS accounts in August-2016 as a "one-time" measure.

If your Tier-1 or Tier-2 account became in-active before August-2016, you can now make contributions without paying penalty or without filling up the required forms.

Please note that it is a "one-time" only concession from PFRDA. Your account will become in-active in future if you don't contribute the minimum required amount in a financial year.

 

Who Regulates NPS?

PFRDA regulates the NPS system. PFRDA stands for Pension Funds Regulatory and Development Authority.

 

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

This is an ongoing process and the list may grow in future.

 

Default 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 

  • Asset Class C

  • Asset Class G

 

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

  • Auto choice

 

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 NPS 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.

 

Different Investment Options for Tier 1 & 2 Accounts

You can select different PFMs (Pension Fund Manager) and investment options for Tier 1 and Tier 2 accounts.

 

How to Calculate Returns in NPS?

There is no defined or guaranteed return in NPS. Returns from NPS 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 Maturity (60 Years of Age)?

Retirement age for NPS scheme is 60 years.

Your contribution to NPS 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.

Note:

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 installments). But, you should purchase Pension fund before the phased withdrawal.

 

Extension Beyond 60 Years of Age

You can voluntarily extend your contribution to NPS 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 NPS.

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 NPS 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 NPS 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 NPS 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

Pre-mature exit is allowed if you want to retire early or if you do not want to continue NPS before the age of 60 years.

Pre-mature exit is allowed only after completion of 10 years from the date of joining NPS.

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.

Note:

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

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 NPS.

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)

  • 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

    1. Cancer
    2. Kidney failure (end stage renal failure)
    3. Primary Pulmonary Arterial Hypertension
    4. Multiple sclerosis
    5. Major Organ transplant
    6. Coronary Artery bypass graft
    7. Aorta graft surgery
    8. Heart Valve surgery
    9. Stroke
    10. Myocardial Infraction
    11. Coma
    12. Total Blindness
    13. Paralysis
    14. Accident of serious or life threatening nature
    15. Any other critical illness of a life threatening nature as mentioned in circulars, guidelines or notifications issued by the authority from time to time

 

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 nomines under NPS 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 NPS.

  • Filled Withdrawal application form 

  • PRAN card in original

  • Proof of Identity (attested copies)

  • Proof of Address (Attested copies)

  • A cancelled cheque

 

Loan Facility

There is no loan facility in NPS.

 

Pension or Annuity

A pension is a financial instrument that provides regular monthly income during retirement life.

 

Pension or Annuity Service Provider (ASP)

Life Insurance companies regulated by "Insurance Regulatory and Development Authority (IRDA)" will act as a Annuity Service Providers.

The following are the list of companies for ASP.

  • Life Insurance Corporation of India

  • SBI Life Insurance Co. Ltd

  • ICICI Prudential Life Insurance Co. Ltd

  • Bajaj Allianz Life Insurance Co. Ltd

  • Star Union Dai-ichi Life Insurance Co. Ltd

  • Reliance Life Insurance Co. Ltd

  • HDFC Standard Life Insurance Co. Ltd


The above list is an ongoing process and the list may grow in future.

 

Different Types of Pension

The following are the different types of pensions schemes offered by Annuity Service Providers to the subscribers of NPS.

  1. Pension payable for life at a uniform rate to the pensioner only. 

  2. Pension payable for 5, 10, 15 or 20 years certain and thereafter as long as you are alive

  3. Pension for life with return of purchase price on death of the pensioner

  4. Pension payable for life increasing at a simple rate of 3% per annum

  5. Pension for life with a provision of 50% of the pension payable to spouse during his/her lifetime on death of the pensioner

  6. Pension for life with a provision of 100% of the pension payable to spouse during his/her lifetime on death of the pensioner

  7. Pension for life with a provision of 100% of the pension payable to spouse during his/her lifetime on death of the pensioner and with return of purchase price on death of the spouse. If the spouse predeceases the pensioner, payment of pension will stop after the death of the pensioner and purchase price is paid to the nominee

 

Default Pension Scheme & ASP

The following is the default pension scheme if the subscriber does not choose anything specific.

Default Annuity Service Provider is "Life Insurance Corporation of India (LIC)".

Default Pension Scheme is "Pension for life with a provision of 100% of the pension payable to spouse during his/her lifetime on death of the pensioner".

 

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

 

Portability from EPF to NPS

You can move your entire funds in EPF (Employee Provident Fund) to NPS. This portability is tax free from 01-Apr-2016 onwards.

 

Nomination

Nomination facility is available in NPS.

You can nominate either at the time of account opening or after opening the account.

You can nominate up to 3 nominees for your NPS 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.