All you need to know about the National Pension Scheme (NPS)
Having a sufficient corpus after retirement is what everyone wants so that they can lead a comfortable retired life. While there are various avenues which help build up a retirement corpus, having an earmarked avenue which is meant only for retirement funding is better. With this sentiment in mind, the National Pension Scheme was launched on 1st January, 2000. In the initial years the scheme was open only for the employees of the Central Government except the armed forces. Later on, in the year 2009, the scheme was opened to the general public. Currently, any individual can invest in the NPS scheme to create a retirement corpus.
What is NPS?
NPS is an investment scheme where individuals can contribute regularly when they are earning an income. Thereafter, after retirement, the invested corpus can be partially withdrawn in lump sum and partially used for availing annuities.
Who can invest in NPS?
Every Indian citizen in the age bracket of 18 years to 60 years can invest in NPS. Even NRIs can invest in NPS if they want. However, if the citizenship of the NRI changes the scheme would be closed for them.
How to invest in NPS?
You can invest in NPS scheme through financial institutions which are called Point of Presence (POP). Almost every Indian bank and other financial institutions act as POPs which allow you to invest in the NPS scheme with them. Their authorized branches act as collection points where you can deposit your money. These collection points are called Point of Presence Service Providers or POP-SPs. You can get the list of POPs on the website of Pension Fund Regulatory and Development Authority (PFRDA) (https://www.npscra.nsdl.co.in/pop-sp.php ) which is also the governing body of the NPS scheme.
What are the documents required when opening a NPS account?
After you have located the POP, you can invest in the NPS scheme by submitting the investment amount and your relevant documents. The documents which are required to open the NPS account include the following –
- Registration form
- Identity proof
- Age proof
- Address proof
Different types of NPS accounts
When you choose to invest in NPS, you would have the choice of three types of NPS accounts. These types are as follows –
- Tier I Account is the account into which contribution is compulsory. Withdrawals are restricted till the investor attains 60 years of age. Even at that time, withdrawal from the account is restricted and subject to conditions. The minimum investment required in this account is INR 6000 yearly.
- Tier II account is a voluntary account chosen by the investor. It can be chosen only if the investor has an active Tier I account. The contributions made into this account can be withdrawn anytime as per the discretion of the investor. The minimum investment is INR 1000 to open the account and at the end of a year the minimum balance in the account should be at least INR 2000.
- The Swavlamban scheme is meant for the economically weaker sections of the society. Under this scheme, the Government contributes INR 1000 every year for 4 years to the NPS scheme. The scheme is available for individuals who are economically weak and have opened a NPS account in the year 2010-11
Multiple NPS accounts are not available. Investors can invest only in the above-mentioned types of accounts. Moreover, if the minimum investment criterion is not fulfilled, the NPS account is frozen. To activate the account the investor would have to visit the POP and pay the minimum required amount with a penalty of INR 100.
The basics of investing in the NPS scheme
When investing in the NPS scheme, you would have two choices of investments –
- Active choice – this choice is when you manage your investments on your own. There are three types of funds available for investment under this choice which are –
- Asset class E which invests at least 50% of its portfolio in stocks
- Asset class C which invests in instruments having fixed interest rates except Government securities
- Asset class G which invests only in Government securities.
Under the Active choice of investment, the investor can choose to invest the money either entirely in C and G asset classes or in a combination of E, C and G classes with a maximum limit of 50% when investing in asset class E.
- Auto choice – under this choice the investor doesn’t have to manage his investments. The investments are managed automatically based on his age. Investment is done in a predetermined manner as directed by the PFRDA. If the investor is aged 18 years to 36 years, 50% of the money would be invested in Asset class E, 30% in C and 20% in G. This ratio would remain constant till the investor attains 36 years of age. Once the investor attains 36 years of age, the percentage of investment in classes E and C would decrease annually increasing the investment in Asset class G. This reduction in E and C and increment in G would continue every year till the asset allocation becomes 10% in E, 10% in C and the remaining 80% in G when the investor is 55 years of age. Thereafter, the allocation would again remain constant.
The money which is invested in the NPS account is then managed by pension fund managers who are registered with PFRDA. Presently, PFRDA has registered eight fund managers which are as follows –
- LIC Pension Fund
- ICICI Prudential Pension Fund
- Reliance Capital Pension Fund
- Kotak Mahindra Pension Fund
- UTI Retirement Solutions Pension Fund
- SBI Pension Fund
- DSP Blackrock Pension Fund Managers
- HDFC Pension Management Company
Investors can choose to invest in any type fund and as per any investment strategy to build their retirement corpus. They can also choose their fund managers for managing their money. Moreover, once the investment strategy and asset class is selected, it can also be changed once in a financial year in both Tier I and II accounts.
Permanent Retirement Account Number (PRAN)
When you invest in the NPS scheme you are allotted a PRAN card which is like a PAN card for retirement benefits. The card contains a unique PRAN number, your name, your father’s name, signature or thumb impression and your photograph. You can apply for the PRAN card online or offline. The method is as follows –
- Online application – you would have to visit the website of NSDL, download the PRAN card application form, fill the form and submit it online. Once the form is submitted, the PRAN number is generated
- Offline application – you would have to visit the website of NSDL and download the PRAN card application form. Then you would have to fill the form, attach your KYC documents and mail the form and documents to NSDL’s office. Once the form is verified, the PRAN would be generated.
Maturity or withdrawal from the NPS account
While withdrawals from Tier II accounts are allowed freely, Tier I accounts have restricting conditions. These conditions are as follows –
- If the investor wants to withdraw the money and exit from the scheme before attaining 60 years of age, 20% of the corpus is allowed to be withdrawn in lump sum. The remaining 80% of the corpus should be used to purchase annuities.
- Partial withdrawals are also allowed from the scheme before the investor attains 60 years of age and the scheme matures. Partial withdrawals are allowed for up to 25% of the corpus from the third year after opening the NPS account. These withdrawals are allowed for specific purposes like medical contingencies, children’s education, marriage costs, etc. such withdrawals can be made for a maximum of 3 times during the tenure of investment and each withdrawal should have a minimum gap of 5 years.
- If the investor has attained 60 years of age and wants to quit the scheme, 60% of the corpus can be withdrawn in lump sum. The remaining 40% of the corpus should then be used to avail annuities.
- If the total corpus at the time of maturity of the scheme is below INR 2 lakhs, the entire amount can be taken in lump sum
- If the investor dies before attaining 60 years of age, the nominee can withdraw the entire corpus in one lump sum.
So, withdrawal from the NPS Tier I account can be summarised in the following way –
Moreover, the investor can also defer withdrawing from the NPS scheme after attaining 60 years of age. Deferment is allowed for 10 more years till the investor attains 70 years of age.
Process of withdrawing from the scheme
To withdraw from the NPS scheme, you would have to follow a process which is as follows –
Fill up a withdrawal form and submit it to the POP with your documents. The documents include the following –
- Your original PRAN card
- A cancelled cheque
- Attested photocopies of your proof of identity and address
Once the documents are submitted along with the withdrawal application, they would be verified by the POP–
After verification the documents are forwarded to the Central Recordkeeping Agency (CRA) and NSDL–
The withdrawal claim would be registered by the CRA which would send you the application form and the list of documents required to be submitted–
After you complete the formalities, the withdrawal application is processed by the CRA and you get the settlement of your NPS account.
Tax treatment of NPS contributions and withdrawals
- Tax implications on NPS investments
NPS investments are tax-free in the hands of the investor for the contributions done to Tier I account. This means that you can claim a deduction on your taxable income for the investment done in the NPS scheme. However, contributions done to Tier II account do not enjoy tax reliefs. They are taxable in the hands of the investor.
The tax benefits on NPS investments are available under three different sections. These are as follows –
|Applicable sections||Who can claim the deduction||Limit of deduction available|
|80 CCD (1)||Both salaried employees and self-employed individuals||For salaried employees – up to 10% of the basic salary + DA
For self-employed individuals – up to 10% of annual income
However, in both cases, the maximum limit of deduction available is limited to INR 1.5 lakhs which also includes deductions available under Section 80C
|80 CCD (2)||Salaried employees whose employer’s contribute towards NPS scheme||Up to 10% of the basic salary + DA|
|80 CCD (1B)||Salaried employees, self-employed individuals and ordinary individuals having an income||Up to INR 50,000. This is in addition to the limit of Section 80C and 80 CCD (1)|
Thus, individuals can claim a maximum deduction of INR 2 lakhs by investing in NPS through Sections 80C, 80CCD (1) and 80 CCD (1B). Moreover, the employer’s contribution is allowed additionally as a deduction under Section 80 CCD (2).
- Tax treatment of withdrawals from the scheme
In case of withdrawals, tax treatment depends on when the amount is withdrawn. Let’s understand –
|Time when withdrawal is done||Amount of withdrawal||Tax treatment|
|When NPS matures and the investor attains 60 years of age||60% of the corpus||No tax is levied on the lump sum withdrawal|
|40% of the corpus in the form of annuity||Annuity payouts are considered to be an income. They are, therefore, added to the taxable income and taxed at the investor’s tax slab|
|When the investor dies||Full corpus||Completely tax free|
|Before the maturity of NPS, i.e. before attaining 60 years of age||25% of the corpus for specific needs||Completely tax-free|
|20% of the corpus for other needs||Completely tax free|
|80% of the corpus received in annuity||Annuity payouts are considered to be an income. They are, therefore, added to the taxable income and taxed at the investor’s tax slab|
Given these tax implications, NPS is considered to be an EET (Exempt, Exempt, Taxed) investment scheme where the investment is tax exempt, returns are tax exempt but annuity payouts are taxable.
Annuity payouts under the NPS scheme
Annuity means a series of payments which are done at regular periodic intervals at predefined rates and for a predefined period. Annuities, therefore, provide a source of regular incomes. Under NPS schemes, 40% or 80% of the corpus is payable in the form of annuity depending on when you exit from the scheme. Annuity payouts ensure that you get a series of regular incomes after you retire to meet your lifestyle expenses. This way, NPS creates a retirement income and proves useful. Moreover, there are different options of annuity payouts which you can choose to receive depending on your financial requirements.
These options include the following –
- Annuity payable for the lifetime of the investor at a uniform rate
- Annuity payable for a guaranteed period (5,10 or 20 years) and thereafter payable for the lifetime of the investor at a uniform rate
- Annuity payable for the lifetime of the investor at a uniform rate. On death of the investor, the purchase price is returned
- Annuity payable for the lifetime of the investor where the annuity amount increases @ 3% on a simple interest basis
- Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 50% of the annuity is payable to the spouse for his/her lifetime
- Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 100% of the annuity is payable to the spouse for his/her lifetime
- Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 100% of the annuity is payable to the spouse for his/her lifetime. After the death of the spouse, the purchase price is returned to the nominee.
Who pays annuities under the NPS scheme?
You can choose to receive annuity payouts from any of the insurance companies which are empanelled with PFRDA to pay annuities under the NPS scheme. Presently, the insurance companies empanelled with PFRDA to pay annuities include the following –
- SBI Life Insurance Company Limited
- Star Union Dai-ichi Life Insurance Company Limited
- Life Insurance Corporation of India
- Bajaj Allianz Life Insurance Company Limited
- HDFC Standard Life Insurance Company Limited
- ICICI Prudential Life Insurance Company Limited
- Reliance Life Insurance Company Limited
So, understand the complete details about the National Pension Scheme before you choose to invest in it so that you can know exactly what the scheme promises and how it helps in tax planning.