Here’s What You Should Know about National Pension Scheme

The National Pension System (NPS) is an elective retirement savings scheme created to empower individuals to plan for their future by saving systematically during their working years. It encourages citizens to develop the habit of saving for retirement, aiming to address the challenge of providing sufficient post-retirement income for every Indian.

Under the NPS, individual savings are clubbed into a pension fund and professionally handled by the PFRDA-monitored fund managers. These funds are invested in a diversified portfolio consisting of government bonds, treasury bills, debentures, and shares, with returns determining the growth of contributions over time.

When exiting the NPS, users have the option to utilise their accumulated pension wealth to purchase a life annuity from an empaneled life insurance Company regulated by PFRDA or withdraw a portion of the accumulated pension wealth as a lump sum if preferred.

Keep on reading to know more about NPS.

Features and Benefits of the National Pension Scheme of India

Discussed below are the benefits of the National Pension System -

• Flexibility - This Indian pension scheme provides diverse investment options and a selection of Pension Funds (PFs) to effectively plan and monitor the growth of investments. As a subscriber, you have the flexibility to switch between investment options and fund managers as desired. This allows for a reasonable and customised approach to growing the pension corpus while maintaining control over investment decisions.
• Simple Structure - When you open an account with the National Pension System (NPS), you gain a Permanent Retirement Account Number (PRAN) that remains with you for life. 

The NPS is organised into two tiers for your convenience:

1. Tier-I account: This is a non-withdrawable retirement account where your regular contributions are invested based on the portfolio or fund manager you choose. The funds in this account are intended for long-term savings and cannot be withdrawn easily.
2. Tier-II account: This is an optional withdrawable account that can only be opened if you have an active Tier-I account. The Tier-II account allows you to make withdrawals as per your requirements to offer flexibility and accessibility when required, all while ensuring that your Tier-I savings remain intact.

• Well-Monitored - NPS, regulated by Pension Fund Regulatory and Development Authority (PFRDA), follows transparent investment norms and undergoes regular monitoring and performance reviews by NPS Trust. Compared to similar pension products worldwide, NPS boasts the lowest account maintenance costs. This is crucial when saving for long-term goals like retirement as these charges can significantly impact the accumulated corpus over a 35-40 year investment period.
• Portability - The National Pension Scheme (NPS) offers effortless portability across jobs and locations, ensuring a hassle-free experience for individual subscribers. Unlike many pension schemes in India, NPS allows individuals to seamlessly transition to new jobs or locations without losing the accumulated corpus. This means that even when changing employment or relocating, subscribers can maintain their pension savings intact. This way, the NPS eliminates the inconvenience of starting from scratch with each transition and provides a convenient and reliable arrangement for individuals.
• Power of Compounding - As you approach retirement, your pension wealth steadily grows over time due to the power of compounding. With low account maintenance charges, the accumulated pension wealth for subscribers can become significantly substantial.
• Easy to Access - The NPS account is easily managed online and can be opened through the eNPS portal.

Here are some features of the National Pension Scheme -

• Equities receive a portion of the national pension scheme's investments.
• The National Pension Scheme offers significantly higher returns compared to traditional tax-saving options like PPF.
• Annualised returns in the pension plan range from 9% to 12%.
• If dissatisfied with the fund's performance, individuals have the freedom to switch fund managers.
• Under Section 80C of the Income Tax Act, individuals can claim a maximum deduction of Rs. 1.5 lakh in the NPS.
• For Tier-I accounts, subscribers must contribute Rs. 6,000 annually and Rs. 500 as a one-time payment. For Tier-II accounts, the yearly contribution is Rs. 2,000, with a one-time payment of Rs. 250.
• Complete withdrawal of the corpus after retirement is not permitted in this scheme.
• After retirement, individuals can only withdraw 60% of the fund, while the remaining 40% is invested in the pension scheme to receive regular payments.
• NPS accounts can be opened through online or offline methods.
• Withdrawals can be made up to 3 times within a 5-year interval during the entire tenure.
• After maintaining an NPS account for 3 consecutive years, individuals can withdraw up to 25% of the accumulated fund for specific purposes such as medical treatment, higher education, wedding ceremony, purchasing a house, and so on.

Tiers of National Pensions Schemes

The National Pension Scheme offers individuals the opportunity to make regular investments, ensuring that liquidity is never a concern. To access the liquidity benefits, subscribers must have one of the following accounts, along with a unique Permanent Retirement Account Number (PRAN) -

• Tier-1 Account - This account functions as a pension account. While the amount can be withdrawn, certain restrictions are applicable. Note that the minimum amount to be deposited to open this account is INR 500.
• Tier-2 Account - This is an optional account that provides liquidity of funds via investments and withdrawals. To open this account, a minimum deposit of INR 250 needs to be made. 

Note: You should have a Tier-1 account to open a Tier-2 account.

How to Calculate the Pension Amount?

You can easily calculate the pension or lump sum amount that you can expect upon maturity of your National Pension Scheme account via a pension calculator. This online tool makes calculations depending on your regular contributions, the portion of corpus reinvested in buying an annuity, and assumed return on investment rates.

To get an estimate, provide the following details to the calculator -

• Date of birth
• Monthly contribution amount
• Total years of contribution
• Expected return on investment
• Annuity purchase percentage
• Expected annuity rate

Who Should Invest in the National Pension Scheme?

The NPS presents an excellent opportunity for individuals who prioritise early retirement planning and prefer low-risk investments. It undoubtedly offers a valuable advantage, particularly to those retiring from private-sector positions, by providing a consistent income during their retirement years.

Opting for this systematic investment can significantly impact your post-retirement life. Moreover, individuals with salaried incomes who aim to maximise their 80C deductions can also explore this scheme’s benefits. By considering the NPS, you can secure a stable pension and enhance your financial well-being in the long run.

Eligibility Criteria to Join National Pension Scheme

To be able to join the National Pension System (NPS), individuals must meet the following criteria:

• Nationality: The applicant should be an Indian citizen - whether residing in India or abroad or a Non-Resident Indian (NRI).
• Age: The eligible age range for this scheme is between 18 and 70 years.
• Know Your Customer (KYC): Compliance with the KYC norms outlined in the application form is mandatory.
• Legal Competence: The individual must possess the legal capacity to enter into a contract in accordance with the Indian Contract Act.
• Ineligibility: Overseas citizens of India (OCI), Persons of Indian Origin (PIOs) along with Hindu Undivided Families (HUFs) don’t qualify to participate in the NPS.

Note - NPS is an individual pension account and cannot be opened on behalf of another person.

Rules to Withdraw from the Pension Scheme of India Early

Here are the rules with respect to making an early withdrawal from the National Pension System account - 

• Superannuation: Once a member attains the age of 60 or superannuation, they are required to utilise a minimum of 40% of their accumulated retirement corpus to acquire an annuity that guarantees a regular monthly pension - the remaining funds can be withdrawn as a lump sum. However, if the entire pension lump sum is equal to or less than Rs. 5 lakh, the subscriber has the option to withdraw the entire amount as a lump sum.
• Premature exit: In the case of an early exit from the pension scheme before reaching the age of 60 or superannuation, a minimum of 80% of the subscriber's accrued retirement corpus must be utilised to buy an annuity plan that provides a regular monthly income. If the total corpus is Rs. 2.5 lakh or lower, the subscriber has the choice to withdraw the entire amount as a lump sum.
• Death of the subscriber: In the unfortunate event of the subscriber’s demise, the entire pension corpus (100%) will be paid to their nominee or legal heir.

NPS for NRIs

The National Pension Scheme (NPS) offers an excellent opportunity for Non-Residential Indians (NRIs) to secure their financial future post-retirement even while living abroad. However, while NRIs can avail themselves of the numerous benefits associated with the scheme by opening an NPS account, certain eligibility criteria must be met.

Features and Benefits of the National Pension Scheme for NRI

Here are the features and benefits of the National Pension Scheme for NRIs -

• The NPS account's investment portfolio is characterised by a remarkable level of diversification, providing investors with the flexibility to allocate funds across a variety of investment options. These options include corporate bonds, equity, and government securities. 
• Depending on the investor's risk appetite, a substantial portion of the fund (up to 85%) can be directed towards corporate bonds, equity, or government securities. 
• NRIs can choose from two types of investment options offered by NPS: Active Choice and Auto Choice. Under the Active Choice, NRI investors have the freedom to determine the allocation ratio and asset classes for their investments. On the other hand, Auto Choice employs a strategy where the investments are made on behalf of the NRI investor, taking into consideration their age. 
• To facilitate identification and management, every subscriber is issued a PRAN card, which features a unique 12-digit identification number.

How to Open a National Pension Scheme Account?

You can open a National Pension Scheme account online or offline. Both ways are explained in detail below -

Online Process

Under this mode, opening an NPS account has become effortless and straightforward for individuals. To initiate the process of opening an NPS account online, it is crucial to establish a connection between the account, PAN, Aadhaar, and mobile number.

Check out the steps for opening a National Pension Scheme Account online -

• Visit the website enps.nsdl.com.
• Select the subscriber type: either "corporate subscriber" or "individual subscriber."
• Choose your residential status: "Indian Citizen" or "NRI."
• Decide on the type of account: Tier I, Tier II, or both (mandatory for long-term savings).
• Provide your PAN details and select a suitable POP (Point of Presence) or bank.
• Click on the registration option and opt for 'register with Aadhaar.'
• Enter your Aadhaar number and click on 'generate OTP (One Time Password).'
• An OTP will be sent to your registered mobile number.
• Enter the OTP along with your personal information, bank details, and nomination details.
• Submit the application form, after which you will be allotted a Permanent Retirement Allotment Number (PRAN).
• Upload your e-signature and photograph. Another OTP will be sent to your registered mobile number.
• Verify the signature by entering the OTP and proceed to make payment.
• Use the net banking option on the payment gateway to pay the required charges.
• Once the payment is successful, your permanent retirement account number will be generated.

Offline Process

To open your National Pension Scheme account manually, observe the following steps -

• Select the desired bank account status, whether it is repatriable or non-repatriable.
• Provide the necessary information about the NRE or NRO bank account and include a scanned copy of your passport.
• Choose a suitable communication address, either an overseas address or a permanent address.
• Once the Permanent Retirement Account Number (PRAN) is assigned, you must proceed with the authentication process.
• If opting for the e-sign option, select the e-sign choice on the E-sign/Print & Courier page.
• Authenticate the registration by entering the OTP sent to the registered mobile number, which should be linked to your Aadhaar Card.
• After successful Aadhaar authentication, the registration form will be signed.
• Please note that NRIs are subject to a service charge for e-signing the registration form.

Go through the following FAQ section to know more about the National Pension Scheme.

Frequently Asked Questions