National Pension System (or earlier called National Pension Scheme) is a retirement savings scheme introduced by the government. Here is all you need to know about it.
Updated on: 15-Sep-2022
The National Pension System is an initiative of the government to extend pension benefits to all Indian citizens. It is mandatory for central-government employees and the employees of some state governments to invest in the NPS. As per the earlier government directive, private-sector employees were proposed to be given a choice between the Employees' Provident Fund Organisation (EPFO) and the NPS which was later withdrawn. The employee contribution is generally 10 per cent of the basic salary and DA, with a matching contribution made by the employer. For central-government employees, the contribution by the government has been raised to 14 per cent. You can open two types of account under NPS - Tier I and Tier II. Now there is an additional account called Tier II - Tax Saver Scheme (NPS - TTS) available only for central- government employees.
Features of NPS
2) Entry age
3) Minimum investment
5) Account-holding categories
Investment objective and risks
The main objective of the National Pension System is to instil the discipline to save and invest in an old-age pension. The NPS is a defined-contribution scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA), where the investment is to be maintained until retirement. On retirement, a part of the corpus is allowed to be withdrawn as a lump sum and the balance is mandatorily paid out as a pension annuity.
Suitability and alternatives
Aspects of National Pension System
1) Capital protection and inflation protection
Your capital is not protected, as the NPS invests a certain amount in equities. The returns are, therefore, market-linked. However, equities are expected to beat inflation over the long term, thus building a certain level of inflation protection into the National Pension System.
In the case of the NPS, after three years of being in the scheme, you can withdraw up to 25 per cent of the contributions for defined expenses. These defined expenses are children's higher education or marriage, construction or purchase of the first house and treatment of critical illness for self, spouse, children or dependent parents. The regulations have defined 13 critical illnesses and have extended this facility to accidents or other ailments of a life-threatening nature, including COVID-19.
The point to note is that the 25 per cent limit will be calculated on the contributed amount, not on the account balance. Suppose you have contributed Rs 5,000 per month for three years. You would be eligible to withdraw Rs 45,000, i.e., 25 per cent of Rs 1.8 lakh. You can make up to three withdrawals (with a gap of five years) during the tenure.
3) Exit option
4) NPS scheme tax benefits: Tax implications
Tax deduction on investments up to Rs 1.5 lakh (under Section 80CCD) and Rs 50,000 [under Section 80CCD (1B)] can be availed in a financial year. 60 per cent of the amount received at the completion of the term is tax-free. However, this tax benefit is not available for Tier II - Regular NPS account.
Where to open the account
You can open an NPS account with many PoP (Point of Presence) including some public and private banks. To view the list of empanelled POP, visit https://enps.nsdl.com/eNPS/
How to open an account
If you are not KYC compliant, you will need the following:
Types of National Pension System accounts
The NPS works on a defined-contribution basis and has three types:
List of Pension Fund Managers (PFMs)
The following is the list of NPS managers:
Currently, the following annuity service providers are empanelled with the PFRDA:
Investment options: ECGA of the NPS
The National Pension System offers different funds with varying exposure to equity funds (E), corporate debt (C), government securities (G) and alternative investment schemes (A). Of these asset classes, equity carries the maximum risk (and chances of maximum returns) and government securities carry minimum risk (and least returns). The following are the investment options available:
The newly introduced Tier II - TTS scheme has a fixed mandate of investing between 10 and 25 per cent in equity and the remaining in fixed income for the pension funds. Exposure to cash and money-market securities has been restricted to a maximum of 5 per cent. There is no investment choice to the subscriber.