National Pension Scheme (NPS) is an initiative by the Government of India that can benefit all the citizens of India. This scheme provides social security to the subscribers by providing the pension amount. This scheme is open to all individuals -public, private, and unorganized sectors as well, The scheme encourages people to invest in a pension account at regular intervals during their employment years. After retirement, the subscriber can take a certain percentage of the corpus and the remaining amount will be provided as a monthly pension.
It is a voluntary scheme and can be availed by any Indian citizen to secure his/her retirement. It is regulated and administered by the PFRDA or Pension Fund Regulatory and Development Authority under the PFRDA Act, 2013. NPS comes with many other benefits as well like tax benefits, taxations, etc. In this article, we will discuss National Pension Scheme NPS, Benefits, Taxation, Interest rate, etc.
Table of Contents
What is National Pension Scheme?
National Pension Scheme is a social security initiative that is guaranteed by the Government of India. As a subscriber of NPS, you will be eligible to receive a monthly pension post-retirement. This is a voluntary-based scheme with returns connected to the market. Earlier, this scheme was only available to Central Government employees but now PFRDA opened this scheme to every individual. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.
NPS matures at 60 years which is extendable up to 70 years, you can also partial withdrawal up to 25% of the contribution after 3 years of opening the account in specific situations like purchasing a home, sponsoring a child’s education, or for the treatment of any critical illnesses. The return on the investment is linked to markets like equity and debt instruments, and the interest rate is 8-10%. The minimum amount that you can invest in NPS is Rs.6000/- annually one time or Rs.500/- as monthly installments.
What are Market Linked Pension Schemes?
Market Linked Pension Schemes can be bisected into “market-linked” and “Pension”. Market linked means when the returns on your investment are dependent on the stock market, the investment is invested into the stock market by a fund manager in equity and debt instruments. The return in the market-linked pension is good for the long term but the market-related risk is always there. The risk, however, can be overseen as this scheme is provided by the Central Government.
List of Fund Managers of NPS
The following are the list of fund managers allowed by the Government to provide NPS scheme options-
- HDFC Pension Fund
- UTI Retirement Solutions
- SBI Pension Fund
- ICICI Pension Fund
- Kotak Mahindra Pension Fund
- Reliance Pension Fund
- LIC Pension Fund
- Aditya Birla Pension Fund
Best Market Linked National Pension Scheme Available
Top Performing NPS Tier-I Returns 2021
| Pension Fund Managers | Returns* | |||
| 6-month | 1-year | 3-year | 5-year | |
| HDFC Pension Fund | 9.16% | 9.56% | 14.72% | 11.90% |
| UTI Retirement Solutions | 7.71% | 8.77% | 13.50% | 11.85% |
| SBI Pension Fund | 8.26% | 9.73% | 13.49% | 11.38% |
| ICICI Pension Fund | 9.56% | 9.30% | 13.11% | 11.12% |
| Kotak Mahindra Pension Fund | 9.30% | 9.28% | 13.00% | 11.12% |
| Reliance Pension Fund | 7.51% | 9.15% | 12.05% | 10.32% |
| LIC Pension Fund | 7.07% | 8.13% | 11.86% | 10.22% |
| Aditya Birla Pension Fund | 6.22% | 7.12% | NA | NA |
Top Performing NPS Tier-II Returns 2021
| Pension Fund Managers | Returns* | |||
| 6-month | 1-year | 3-year | 5-year | |
| HDFC Pension Fund | 9.20% | 9.47% | 14.87% | 11.50% |
| UTI Retirement Solutions | 7.54% | 9.39% | 13.66% | 11.96% |
| SBI Pension Fund | 8.24% | 9.71% | 13.50% | 11.39% |
| ICICI Pension Fund | 9.64% | 9.32% | 13.16% | 11.14% |
| Kotak Mahindra Pension Fund | 9.29% | 9.54% | 13.03% | 11.12% |
| Reliance Pension Fund | 7.34% | 8.94% | 12.08% | 10.32% |
| LIC Pension Fund | 6.83% | 8.51% | 11.74% | 8.97% |
| Aditya Birla Pension Fund | 5.81% | 6.61% | NA | NA |
Eligibility of NPS
The following are some of the eligibility criteria that the NPS subscriber must have to buy this scheme-
- This scheme is for every individual with Indian Citizenship. Earlier, it was only available to central government employees but now any employee can subscribe to it.
- NRI is also eligible for this scheme
- The age limit for NPS is 18-65 years, anyone falling between this age gap is eligible to subscribe to NPS.
Types of NPS Account
There are two types of NPS account options to choose from- Tier-I and Tier-II. Tier-I NPS account is compulsory for everyone whereas, Tier-II is an optional account that you can opt for. The following are some of the differences between Tier-I and Tier-II NPS Account-
| Particulars | NPS Tier-I Account | NPS Tier-II Account |
| Status | Default | Voluntary |
| Withdrawals | Not permitted | Permitted |
| Tax exemption | Up to Rs 2 lakh p.a.(Under 80C and 80CCD) | 1.5 lakh for government employees Other employees-None |
| Minimum NPS contribution | Rs 500/- or 1,000/- p.a. | Rs 250 /- |
| Maximum NPS contribution | No limit | No limit |
Benefits of National Pension Scheme
There are a lot of benefits to the National Pension Scheme which makes it a lucrative option for an individual retirement. The following are some of the benefits of NPS-
Returns Estimates
The investment that you initiate towards NPS will be invested in different instruments. With all these instruments you can expect 10-12% of returns, the plan is best suitable for those who want to accumulate funds in the long term and financially secure life after retirement.
Fund Manager and Option to Change
The government allowed seven fund managers to invest NPS funds of the subscribers in a variety of assets to get returns. You have options to choose from different fund managers and you have the flexibility to change the fund managers whenever you want without any hassle.
Investment Demography of NPS
The investment that you make in this scheme is invested in different assets by the fund manager. These assets can be divided into four categories differed by the risk involvement-
Low Risk- Government Bonds
Medium Risk- Corporate Bonds
High Risk- Equity, Share Market, etc.
Very high-Alternate Investments like Real Estate Investment Trust, Infrastructure Investment Trust, etc.
Asset Allocation
In this scheme, you have complete control with some limitations on where your funds go. There are two modes of choice which are as follows-
Active Choice
In this choice, you can choose where your investment should go, however, Maximum equity allocation 75% if you are 50 or below and after 50, each year there will be a fall of 2.5% until the final equity allocation is reached which is 50%
Auto Choice
Auto Choice is where your investments will be allocated automatically based on the below-listed options-
Aggressive life cycle fund-Maximum equity allocation 75% if you are 35 or below and after 35, each year there will be a fall of 4% until the final equity allocation is reached which is 15%
Moderate life cycle fund- Maximum equity allocation 50% if you are 35 or below and after 35, each year there will be a fall of 2% until the final equity allocation is reached which is 10%
Conservative life cycle fund- Maximum equity allocation 25% if you are 35 or below and after 35, each year there will be a fall of 1% until the final equity allocation is reached which is 5%
NPS Withdrawals
Since it is a pension scheme there is a lock-in period of 60 years of age. After 60 years of age, you can choose to continue contributing till 70 years or you can choose to differ(non-contribution) till 70 years of age. The is also a pre-mature withdrawal option available and based on this there are two scenarios which is as follows-
NPS withdrawal after 60
This is the default withdrawal in this scheme. You can withdraw 60% of the amount and the rest 40% of the return will be used to buy an Annuity Plan (compulsory) from any insurance company which will then pay you a monthly pension. If the amount is less than Rs.2 lakh, you can withdraw 100% of your returns.
NPS withdrawal before 60
Premature Withdrawal
Premature Withdrawal is allowed only after 3 years of regular investment and only 3 times in the entire lifetime of the account in every 5 years gap. Premature withdrawal is only allowed in specific cases like terminal illness, children’s education, building a house, house buying, etc.
Premature Exit
Premature Exit is when you want to take early retirement. Premature Exit is allowed only after 10 years of regular investment. A maximum of 20% withdrawal is allowed with 80% going into buying an annuity plan. If the amount is less than Rs.1 lakh, you can withdraw 100% of your returns.
NPS Tax Benefits
Tier-I
This falls in the Exempt, Exempt, Exempt category meaning every return on this type of investment is tax-free except one component. You can enjoy a tax benefit of Rs. 1.5 lakh under section 80CCD(1) of Income-tax Act. Additionally, Rs.50,000/- can be claimed as tax benefit under section 80CCD(1B). If your employer provides NPS contributions then also you can claim a tax benefit of up to 10%.
The return on your investment is also tax-free and the withdrawal in NPS is tax-free but, the compulsory Annuity plan will be treated as income and you have to pay income tax according to the slab you fall in.
Tier-II
Tier-II account is taxable but the subscriber enjoys other benefits.
Social Security
Social Security is an essential element of an individual life, especially after retirement. Social security programs can maintain social cohesion and can prevent irreversible losses of human capital. NPS is a social security scheme designed to provide retirement benefits and ensure that at old age an individual is at least monetarily self-sufficient.
Comparing NPS with ELSS
When we compare National Pension Scheme with Equity-Linked Savings Scheme both these instruments invest in equity. Since NPS has diversified investments with low risk, the return when compared to ELSS is less. ELSS invest in equities which gives varied returns depends on markets however, the risk involved in these instruments is high. The lock-in period of tax-saving mutual funds is also lesser than NPS – only three years compared to NPS.
Comparing NPS scheme with other Tax Saving Schemes
The following are some of the instruments compared with NPS based on the traits-
| Investment | Interest | Lock-in period | Risk Profile |
| NPS | 8% to 10% (expected) | Till retirement | Market-related risks |
| ELSS | 12% to 15% (expected) | 3 years | Market-related risks |
| PPF | 8.1% (guaranteed) | 15 years | Risk-free |
| FD | 7% to 9% (guaranteed) | 5 years | Risk-free |
How to Register for NPS?
You can open an NPS account using both online and offline methods. The Pension Fund Regulatory and Development Authority of India, PFRDA regulates the NPS account operations. The following are both online and offline registration of the NPS-
Online Registration
The following are the steps of the online registration process for opening an NPS account-
- Visit the official website of eNPS
- Choose the type of subscriber from the available option ‘corporate Subscriber’ and ‘Individual Subscriber’
- Now choose your residential status from ‘Indian Citizen’ or ‘NRI’
- Select only Tier-I or both Tier-I and Tier-II account as per your liking
- Enter the PAN details and choose a suitable POP or Bank
- Now click on the Registration and choose registration with Aadhar
- Enter the Aadhar number and click on generate OTP
- An OTP will be sent to your mobile number. Enter the OTP in the given space and click submit
- Now payment gateway will be opened. You have to make payment using net banking, Credit/Debit card, etc.
- Once payment is done, your Permanent Retirement Account Number (PRAN) will be initiated
Offline Registration
To open the NPS account offline, the individual has to find the nearest Point of the Individual and submit the form along with the KYC papers. After the first installment of the investment, your Permanent Retirement Account Number (PRAN) will be created. The PRAN number along with the password will be sent to you within a welcome kit. The offline process to open the NPS account includes one-time registration fees of Rs.125. The NRIs need to complete a few additional steps to complete the process. The following are the offline process of registering for an NPS account-
- Choose the status of the bank account i.e. repatriable or non-repatriable
- Provide the details of the NRE or NRO bank account along with a scanned copy of the passport
- Choose the communication address where you can be contacted if needed. You can also provide an Oversea address (for NRI)
- After receiving PRAN is allotted the applicant has to authenticate the account
- For the e-sign option, the applicant will need to choose the option of e-sign
- An OTP will be sent to the registered mobile number i.e. linked to your Aadhar Card
- After authentication, the registration form is successfully signed
- It is important to note that a service charge is applicable for NRIs for E-signing the registration form.
Other Similar Schemes
There are other saving schemes like NPS in which you can plan your retirement like Public Provident Funds. Other savings schemes like Sukanya Samridhi Yojana, National Saving Certificate and Recurring Deposits could help you plan financial needs well.
FAQ Related to National Pension Scheme
National Pension Scheme is a scheme where the investment that you make is invested in a different instrument that has varied interest options whereas, PPF/EPF have fixed interest rates.
An annuity plan is a plan provided by an insurance company where the subscriber pays a lump sum amount to the insurance company and the company pays back the subscriber a monthly pension.
PRAN stands for Permanent Retirement Account Number. This number is unique to every individual and remains the same for a lifetime.
NO, You cannot own two NPS account. Once Subscribed you will be provided with Permanent Retirement Account Number PRAN. PRAN is the account number that remains the same throughout your lifetime.
Yes, this scheme is also for NRIs provided he/she maintains the residential status until the exit of the scheme.
I’m Shiv Kumar, a graduate with a passion for finance, marketing, and technology. My journey into finance started with a desire to understand money management and investing.
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