National Pension Scheme
The National Pension Scheme (NPS) is a voluntary, long-term investment plan designed to provide retirement benefits. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the Central Government. Here’s a comprehensive overview:
What is the National Pension Scheme (NPS)?
- Social Security Initiative: Open to employees from the public, private, and unorganised sectors, excluding armed forces personnel.
- Encourages Regular Investment: Subscribers contribute regularly during their employment to build a pension corpus.
- Post-Retirement Benefits: A portion can be withdrawn at retirement, and the rest is paid as a monthly pension.
- Tax Benefits: Offers tax deductions under Section 80C and Section 80CCD.
Who Should Invest in NPS?
- Retirement Planning: Ideal for individuals with low-risk appetite aiming for a steady pension post-retirement.
- Salaried Individuals: Particularly beneficial for those wanting to maximize 80C deductions.
- Private Sector Employees: Provides portability across jobs and locations.
Benefits of NPS
- Returns/Interest: Delivers higher returns than traditional investments, with annualised returns ranging from 9% to 12%.
- Risk Assessment: Equity exposure is capped at 50%-75%, reducing gradually with age.
- Regulated: Strictly regulated by PFRDA with transparent norms and regular reviews.
- Flexibility: Allows flexible contributions, choice of investment options, and portability across cities and jobs.
NPS Tax Benefits
Employee Contributions
- Section 80CCD(1): Deduction up to 10% of salary (Basic + DA), capped at Rs. 1.5 lakh.
- Section 80CCD(1B): Additional deduction up to Rs. 50,000.
Employer Contributions
- Section 80CCD(2): Deduction up to 10% of salary, or 14% for Central Government employees, without the Rs. 1.5 lakh limit.
Self-Employed Contributions
- Section 80CCD(1): Deduction up to 20% of gross income, capped at Rs. 1.5 lakh.
- Section 80CCD(1B): Additional deduction up to Rs. 50,000.
Withdrawal and Annuity
- Partial Withdrawal: Tax-exempt up to 25% of self-contribution under Section 10(12B).
- Annuity Purchase: Tax-exempt at the time of purchase; subsequent income is taxable.
- Lump Sum Withdrawal: Tax exemption on 60% of the corpus at superannuation.
Withdrawal Rules
Post-Retirement (60 years)
- Lump Sum: Up to 60% of the corpus can be withdrawn tax-free.
- Annuity: At least 40% must be used to purchase an annuity.
Premature Exit
- Before 60 years: 80% of the corpus must be used to buy an annuity, remaining 20% can be withdrawn.
- Corpus ≤ Rs. 2.5 lakh: Full lump sum withdrawal allowed.
On Death
- Nominee/Legal Heir: Entire corpus is paid to the nominee/legal heir.
Equity Allocation and Fund Management
- Equity Exposure: Capped at 50% for government employees, 50%-75% for others, reducing with age.
- Scheme Options: Choose between auto choice (age-based risk profile) and active choice (investor decides).
- Change of Fund Manager: Flexibility to change fund manager if performance is unsatisfactory.
Types of NPS Accounts
Particulars | NPS Tier-I Account | NPS Tier-II Account |
Status | Default | Voluntary |
Withdrawals | Regulated | Permitted |
Tax Exemption | Up to Rs. 2 lakh | Rs. 1.5 lakh for govt employees, None for others |
Minimum Contribution (Opening) | Rs. 500 | Rs. 1,000 |
Minimum Contribution | Rs. 500/month or Rs. 1,000/year | Rs. 250 |
Maximum Contribution | No limit | No limit |
NPS Interest Rates (as of 31 December 2022)
NPS Tier 1 Returns
Asset Classes | 1-year returns (%) | 5-year returns (%) | 10-year returns (%) |
Equity (Class E) | 15.33-18.81% | 13.11-15.72% | 10.45-10.86% |
Corporate Bonds (Class C) | 12.46-14.47% | 9.27-10.15% | 10.05%-10.64% |
Government Bonds (Class G) | 12.95-14.26% | 10.29-10.88% | 9.57-10.05% |
Alternate Assets (Class A) | 3.98-16.73% | NA | NA |
NPS Tier 2 Returns
Asset Classes | 1-year returns (%) | 5-year returns (%) | 10-year returns (%) |
Equity | 15.19-17.92% | 13.05-15.83% | 10.35-10.58% |
Corporate Bonds | 12.71-16.36% | 9.55-10.17% | 9.86-10.60% |
Government Bonds | 12.61-13.42% | 10.40-12% | 9.59-10.07% |
Systematic Lump Sum Withdrawal (SLW)
Benefits: Generates regular cash flows, additional wealth creation, and income increase alongside annuity.
NPS vs Other Tax Saving Instruments
Investment | Interest | Lock-in Period | Risk Profile |
NPS | 9% to 12% | Till retirement | Market-related risks |
ELSS | 10% to 12% | 3 years | Market-related risks |
PPF | 7.1% | 15 years | Risk-free |
FD | 5% to 7% | 5 years | Risk-free |
How to Invest in NPS
Offline Process
- Find a PoP: Locate a Point of Presence (PoP) registered with PFRDA.
- Submit Form: Collect and submit the subscriber form with KYC documents.
- Initial Investment: Minimum Rs. 500 (monthly) or Rs. 1,000 (annually).
- PRAN: Receive your Permanent Retirement Account Number (PRAN).
Online Process
- Visit: Go to enps.nsdl.com.
- Link: Link your account to PAN, Aadhaar, and mobile number.
- Validate: Use OTP to validate registration.
- PRAN: Receive PRAN for NPS login.
How to Login to Your NPS Account
- Obtain PRAN: Submit necessary documentation to NSDL or PoP.
- Visit Portal: Go to the official NSDL CRA portal.
- Enter Details: PRAN, Date of Birth, New Password, and Captcha.
- Submit: Click submit to generate an IPIN.
- Login: Use PRAN and IPIN to log in to the NSDL portal.
Latest Update
The Central Board of Direct Taxes (CBDT) has notified Form 12BBA, a declaration form for eligible senior citizens to submit to specified banks to be exempted from filing Income Tax Returns (ITR).
Investing in NPS can be highly beneficial for individuals with a low-risk appetite looking for a secure retirement plan. It offers flexibility, potential for higher returns, and significant tax benefits. However, those seeking higher equity exposure may consider other investment options like ELSS mutual funds.
